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<ARTICLE> 7
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 102,494
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 14,032
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 120,265
<CASH> 6,434
<RECOVER-REINSURE> 9,192
<DEFERRED-ACQUISITION> 16,101
<TOTAL-ASSETS> 181,418
<POLICY-LOSSES> 42,009
<UNEARNED-PREMIUMS> 33,939
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 12,500
0
0
<COMMON> 33
<OTHER-SE> 49,899
<TOTAL-LIABILITY-AND-EQUITY> 181,418
87,883
<INVESTMENT-INCOME> 6,807
<INVESTMENT-GAINS> 2,201
<OTHER-INCOME> 2
<BENEFITS> 46,647
<UNDERWRITING-AMORTIZATION> 38,367
<UNDERWRITING-OTHER> 12,698
<INCOME-PRETAX> (5,046)
<INCOME-TAX> (2,360)
<INCOME-CONTINUING> (2,686)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,686)
<EPS-PRIMARY> (.80)
<EPS-DILUTED> (.80)
<RESERVE-OPEN> 24,246
<PROVISION-CURRENT> 45,853
<PROVISION-PRIOR> 794
<PAYMENTS-CURRENT> (21,638)
<PAYMENTS-PRIOR> (13,379)
<RESERVE-CLOSE> 35,876
<CUMULATIVE-DEFICIENCY> 794
</TABLE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number: 1-9580
AMWEST INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-2672141
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6320 Canoga Avenue, Suite 300
Woodland Hills, California 91367
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 704-1111
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
Common Stock, $.01 par value American Stock Exchange, Inc.
Stock Purchase Rights Pacific Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ( X ) No ( ).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( X )
As of March 27, 1997, 3,351,752 shares of common stock, $.01 par value,
were outstanding. As of March 27, 1997, the market value of the voting stock
held by non-affiliates of the registrant, based on the closing sales price of
the registrant's common stock as reported by the American Stock Exchange, Inc.
on such date, was $23,563,604.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 1996 Annual
Meeting of stockholders (incorporated by reference under Part III).
<PAGE>
TABLE OF CONTENTS
Item PART I Page
1. Business 1
General 1
Products 2
Underwriting and Collateral 4
Statutory Net Premiums Written to Statutory
Policyholders' Surplus Ratio 5
Combined Ratios 5
Reinsurance 6
Reserves 7
Investments 11
Marketing and Growth 14
The Safety Association 14
Competition 15
Employees 15
Government Regulation 15
2. Properties 16
3. Legal Proceedings 17
4. Submission of Matters to a Vote of Security Holders 17
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 18
Market Information 18
Holders 18
Dividends 18
6. Selected Financial Data 19
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Results of Operations 21
Liquidity and Capital Resources 24
8. Financial Statements and Supplementary Data 25
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 26
PART III
10. Directors and Executive Officers of the Registrant 27
11. Executive Compensation 27
12. Security Ownership of Certain Beneficial Owners
and Management 27
13. Certain Relationships and Related Transactions 27
PART IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 28
i
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Amwest Insurance Group, Inc., a Delaware corporation ("the Company"), is an
insurance holding company engaged, through its wholly-owned subsidiaries, Amwest
Surety Insurance Company ("Amwest Surety"), Far West Insurance Company ("Far
West"), Far West Bond Services, Condor Insurance Company ("Condor"), Raven
Claims Services, Inc. and Southern California Bonding Services, Inc., in
underwriting surety bonds nationwide, commercial automobile insurance in the
State of California and , to a lesser extent, other property and casualty
coverages in several western states. The surety bonds are underwritten through
30 branch offices, 5 of which are located in California and the balance of
which are located in 20 other states.
On March 14, 1996, the Company completed its previously announced merger
with Condor Services, Inc. ("CSI"), an insurance holding company. In the merger,
each outstanding share of Condor Services' common stock (other than shares owned
by Condor Services as treasury stock or by the Company) were converted into the
right to receive 0.5 of a share of the Company's common stock. In connection
with the merger, the Company issued 992,000 shares of common stock.
The merger has been accounted for under the pooling of interests method.
Accordingly, all financial information presented herein for all periods includes
CSI on a historical cost basis.
On March 1, 1996, the Company purchased Southern California Bonding
Services, Inc., a California corporation. The purchase price was immaterial.
Amwest Surety and Far West underwrite a wide variety of surety bonds, for
small to mid-sized surety accounts through independent agents and brokers. This
type of underwriting involves smaller companies and smaller bond amounts than
typically written by the larger multi-line insurance companies. Bonds are
underwritten using a variety of factors to help mitigate risk, including the
acceptance of full or partial collateral based on the characteristics of the
account. See "Business -Underwriting and Collateral."
According to A.M. Best Company ("Best"), an insurance company rating and
statistical service, property and casualty insurance companies wrote
approximately $2.5 billion in surety net premiums in 1995. The Company ranked
11th nationally when measured by net premiums written for all companies writing
surety. In California, which currently is the largest market for surety business
and where the Company has historically generated a significant portion of its
business, the Company ranked 7th when measured by gross premiums written for all
companies writing surety in 1995. As the Company's branches outside California
have matured, the percentage of surety business generated in California has
declined. In 1996, 20.8% of the Company's surety business was generated in
California as compared to 22.4% in 1995.
Condor primarily writes insurance packages which consist principally of
commercial automobile liability and physical damage coverage and, to a lesser
extent, general liability and other related coverages (excluding hazardous waste
and environmental impairment except with respect to policies written for the
intermodal trucking industry) for insureds involved in general trucking
including solid waste disposal, sand and gravel, transit mix, logging, farm to
market, intermodal trucking, less than total load (LTL), newspaper distribution,
tow truck and limousine services industries. In order to accept coverage written
on commercial policies by Condor Insurance, an applicant must become a member of
the Waste Industry Loss Prevention and Safety Association (d.b.a. "The Safety
Association"). From 1993 to mid-1995, Condor Insurance offered ocean marine
coverage to small boat owners in California and Arizona. Since 1993, Condor
Insurance has also offered automobile private passenger coverage in Arizona.
<PAGE>
The Company was incorporated in California on August 19, 1970 and
reincorporated in Delaware on September 11, 1987. During the year ended December
31, 1995 two of the Company's wholly owned subsidiaries, Amwest Surety Insurance
Company and Far West Insurance Company, reincorporated from California to
Nebraska. Condor remains a California domiciled company. Accordingly, the
Company is now registered with the Nebraska Department of Insurance as an
insurance holding company. Amwest Surety is licensed in all 50 states, the
District of Columbia, Guam and Puerto Rico, Far West is licensed in 43 states
and the District of Columbia and Condor is licensed in California and Arizona.
Amwest Surety and Far West hold certificates of authority from the United States
Department of the Treasury, which qualifies them as acceptable sureties on
Federal bonds. Amwest Surety and Far West are rated (a group rating) "A"
(Excellent) by Best and Condor is rated a "B" (Adequate) .
The term "the Company" unless the context otherwise requires, refers to
Amwest Insurance Group, Inc. and its insurance subsidiaries. The principal
executive offices of the Company are located at 6320 Canoga Avenue, Suite 300,
Woodland Hills, California 91367. The Company's telephone number is (818)
704-1111 and its facsimile number is (818) 592-3660.
PRODUCTS
The Company's major products are:
Contract performance bonds, which guarantee the performance of specific
contractual obligations between the principal and the obligee and/or payments to
labor and material suppliers. Included within this product are contract
performance bonds which are partially guaranteed by the Small Business
Administration ("SBA").
Court bonds, which guarantee that the principal will adequately discharge
the obligations set by a court. These bonds principally consist of bail and
immigration bonds for which the agent is generally primarily liable.
Commercial Surety bonds, which includes all non-contract surety bonds
including numerous types of license and permit, miscellaneous and judicial bonds
for which the Company is primarily liable.
Specialty Property and Casualty, which includes commercial auto liability
and physical damage, general liability, homeowners and other property and
casualty coverages.
The following tables show, for the periods indicated, the premiums written,
net premiums earned, losses and loss adjustment expenses and loss ratios for the
Company's three major types of bonds:
<PAGE>
<TABLE>
<CAPTION>
PREMIUMS WRITTEN
Years ended December 31,
1996 1995 1994
(Dollars in thousands)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Type of Insurance
Contract performance bonds $ 49,782 51.1% $ 54,039 57.4% $ 51,362 54.5%
Specialty Property &
Casualty insurance 25,072 25.9 24,101 25.6 23,737 25.2
Court bonds 13,221 13.6 7,669 8.1 8,677 9.2
Commercial Surety bonds 9,167 9.4 8,375 8.9 10,446 11.1
------------- ------------- ------------- ------------- -------------- -------------
Total $ 97,242 100.0% $ 94,184 100.0% $ 94,222 100.0%
============= ============= ============= ============= ============== =============
</TABLE>
<TABLE>
<CAPTION>
NET PREMIUMS EARNED
Years ended December 31,
1996 1995 1994
(Dollars in thousands)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Type of Insurance
Contract performance bonds $ 46,158 52.5% $ 49,737 58.4% $ 43,353 53.3%
Specialty Property &
Casualty insurance 22,421 25.5 17,872 21.0 19,460 24.0
Court bonds 12,209 13.9 7,816 9.2 8,373 10.3
Commercial Surety bonds 7,095 8.1 9,745 11.4 10,103 12.4
------------- ------------- ------------- ------------- -------------- -------------
Total $ 87,883 100.0% $ 85,170 100.0% $ 81,289 100.0%
============= ============= ============= ============= ============== =============
</TABLE>
<TABLE>
<CAPTION>
LOSSES & LOSS ADJUSTMENT EXPENSES AND LOSS RATIOS
Years ended December 31,
1996 1995 1994
(Dollars in thousands)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Type of Insurance
Contract performance bonds $ 24,430 52.9% $ 20,044 40.3% $ 11,250 26.0%
Specialty Property &
Casualty insurance 18,829 83.4 13,131 73.5 14,633 75.2
Court bonds 1,092 9.0 323 4.1 1,058 12.6
Commercial Surety bonds 2,296 32.4 1,767 18.1 1,796 17.8
------------- ------------- ------------- ------------- -------------- -------------
Total $ 46,647 53.1% $ 35,265 41.4% $ 28,737 35.4%
============= ============= ============= ============= ============== =============
</TABLE>
The loss ratio can be substantially affected by the size and timing of
losses, as well as by underwriting standards and procedures.
<PAGE>
UNDERWRITING AND COLLATERAL
For the surety line of business, the Company individually analyzes the risk
associated with each application it receives, except for selected categories of
miscellaneous bonds. This underwriting evaluation includes verifying the credit
history and financial resources of the applicant. The Company maintains control
of the underwriting process through the use of authority limits for each
underwriter, through committee underwriting of larger risks and through a system
of limited delegation. The Company may require collateral on contract bonds and,
occasionally, other types of bonds based upon an assessment of the risk
characteristics. The risk assessment includes evaluation of the financial
strength of the contractor, the credit history of the contractor, work in
progress and successful work experience. Collateral can consist of irrevocable
letters of credit, certificates of deposit, cash, savings accounts, publicly
traded securities and trust deeds or mortgages on real property. The principal
form of collateral accepted by the Company currently consists of irrevocable
letters of credit and certificates of deposit. Total collateral held as of
December 31, 1996 had a value of approximately $245,243,000. Trust deeds and
mortgages on real property held as collateral are not reflected in this figure
due to the inexact nature of their disposition values. The Company reflects in
its consolidated financial statements only funds received as collateral on which
net earnings inure to the benefit of the Company. This amounted to $29,928,000
at December 31, 1996. Recent reductions in total collateral reflect competitive
market conditions and, further in 1996, a decrease in contract payment and
performance bond writings.
For the specialty property and casualty lines of business, the Company sets
insurance premium rates for various risk classifications based upon its
historical loss experience and industry averages. The Company's rates and
classifications are established using actuarial computations prepared by its
actuarial consultant and are reviewed on a semi-annual basis and adjusted
periodically. The information used by the Company in its actuarial evaluations
includes complete historical claim information related to its experience as an
insurance company and industry data. The Company's insurance premium rates are
subject to rate regulation, which varies by state.
Insurance applications are evaluated and a decision to write a particular
risk at a specific premium is made by the Company's underwriting department. The
Company's policy is to have its underwriting personnel or third party
administrator for the assigned risk business individually review each risk. The
underwriting department or third party administrator determines whether to write
a particular risk after evaluating a number of factors based upon detailed
objective underwriting standards contained in the underwriting standards manual.
These factors include the type and value of the property to be insured, the
location and management of operations conducted by the insured, the experience
and claim history of the insured and, with respect to vehicle coverage, the
driving records of the vehicle operators. When a determination has been made
that an applicant represents an appropriate risk, the Company offers coverage on
a monthly or annual basis.
Many of the Company's specialty property and casualty coverages are offered
in Group Business Package policies. Package policies include fire and allied
lines, commercial inland marine, general liability, commercial automobile
liability, physical damage and surety. The commercial automobile liability
portion of the package policy provides bodily injury and property damage
liability. Property damage liability has a mandatory deductible which applies to
property damage liability coverage. Also, uninsured/underinsured motorist
coverage, medical payments coverage, and comprehensive and collision coverages
are offered. The general liability portion of the Group Business Package covers
bodily injury and property damage liability written on an occurrence basis. The
policy contains customary extensions of coverage. All Group Business Package
policies contain an absolute pollution liability exclusion. Limited pollution
coverage is provided only to the extent required by the U.S. Department of
Transportation ("DOT") regulatory requirements, which generally require minimum
liability policy limits of $750,000 to cover environmental restoration on claims
for insureds who travel interstate or on federal property. Policies covering
garbage dumps and landfills contain exclusions for products and completed
operations and the hazards of explosion, collapse and underground.
<PAGE>
STATUTORY NET PREMIUMS WRITTEN TO STATUTORY POLICYHOLDERS' SURPLUS RATIO
This ratio reflects the leverage of the Company's current volume of net
business in relation to its policyholders' surplus. There are no legal
requirements governing this ratio, but guidelines established by the National
Association of Insurance Commissioners ("NAIC") have historically provided that
the ratio should not exceed 3.0 to 1. In addition, the guidelines can vary
according to the lines of business written. The following table shows, for the
years indicated, the insurance subsidiaries' consolidated ratios:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994 1993 1992
(Dollars in thousands)
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statutory net premiums written $87,396 $82,814 $84,093 $79,194 $62,024
Statutory policyholders' surplus 40,298 45,361 40,467 39,661 38,432
Ratio 2.17 1.83 2.08 2.00 1.61
</TABLE>
In December 1993, the NAIC adopted a Risk-Based Capital ("RBC") Model Law
for property and casualty companies. The RBC Model Law is intended to provide
standards for calculating a variable regulatory capital requirement related to a
company's current operations and its risk exposures (asset risk, underwriting
risk, credit risk and off-balance sheet risk). These standards are intended to
serve as a diagnostic solvency tool for regulators that establishes uniform
capital levels and specific authority levels for regulatory intervention when an
insurer falls below minimum capital levels. The Model Law specifies four
distinct action levels at which a regulator can intervene with increasing
degrees of authority over a domestic insurer as its financial condition
deteriorates. These RBC levels are based on the percentage of an insurer's
surplus to its calculated RBC.
A company's RBC is required to be disclosed in its statutory annual
statement, however, the detailed RBC calculation as well as a company's
corrective action plan will remain confidential. The RBC is not intended to be
used as a rating or ranking tool nor is it to be used in premium rate making or
approval. The Company has calculated it's RBC requirements as of December 31,
1996 and found that it exceeded the highest level of recommended capital
requirement.
COMBINED RATIOS
The combined ratio is the sum of (1) the ratio of losses and loss adjustment
expenses incurred (including a provision for incurred but not reported losses)
to net premiums earned (the "loss ratio") and (2) the ratio of policy
acquisition and general operating costs to net premiums earned (the "expense
ratio").
<PAGE>
The following table shows the loss ratios, expense ratios and combined
ratios of the Company as derived from data prepared in accordance with generally
accepted accounting principles. Generally, if the combined ratio is below 100%
an insurance company has an underwriting profit; if it is above 100% the company
has an underwriting loss.
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Loss Ratio 53.1% 41.4% 35.4% 39.5% 32.9%
Expense Ratio 58.1 63.9 64.2 62.7 65.7
------------- ------------- ------------- ------------- -------------
Combined Ratio 111.2% 105.3% 99.6% 102.2% 98.6%
============= ============= ============= ============= =============
</TABLE>
The increase in the Company's loss ratio is primarily attributable to a
number of large contract bond losses on claims initially reported during 1996
and which adversely developed in the fourth quarter of 1996. Management believes
that it has addressed the problems associated with these large contract bond
losses by making significant changes in 1996. These changes include a
strengthening of underwriting expertise in a number of branches, a required
higher level of contractor visits by underwriting personnel, an adjustment to
the Company's underwriting guidelines for certain specialty construction
programs and a change in the reinsurance arrangements to include an aggregate
stop-loss treaty for the Company's surety bond business.
REINSURANCE
A reinsurance transaction occurs when an insurance company remits or "cedes"
a portion of the premium to a reinsurer as payment for the reinsurer's
assumption of a portion of the risk. Reinsurance does not legally discharge the
insurer from its primary liability for the full amount of the policies, and the
ceding company must pay the loss if the assuming company fails to meet its
obligations under the reinsurance agreement. The Company evaluates and monitors
the financial condition of its reinsurers in order to minimize its exposure to
significant losses from reinsurer insolvencies.
The Company purchases reinsurance for protection against liabilities in
excess of certain limits. The Company imposes stricter underwriting standards
with respect to bonds with penal amounts in excess of reinsured limits.
On the surety lines of business, the Company's subsidiaries maintain an
excess of loss reinsurance treaty with a group of reinsurers lead by Kemper
Reinsurance Company, (the "Kemper Treaty"). Kemper Reinsurance Company is a 50%
participant, Scor Reinsurance Company has a 40% participation and Gerling Global
Reinsurance Corp., USB has a 10% participation in the treaty.
The Kemper Treaty, which was amended on October 1, 1996, may be canceled at
the election of either party by providing notice of cancellation 90 days prior
to any anniversary, however, the reinsurers would remain liable for covered
losses incurred up to the cancellation date. The amended Kemper Treaty limits
the Company's exposure on any one principal (the person or entity for whose
account the surety contract is made, and whose debt or obligation is the subject
of the surety contract) to the first $2,000,000 of loss and to losses in excess
of $6,000,000. Coverage is provided for most types of bonds which the Company
writes except SBA guaranteed bonds, which are not covered by the treaty. The
reinsurers' maximum exposure under the Kemper Treaty is $8,000,000 of losses
discovered during any one contract period (October 1 to October 1). Prior to the
amendment on October 1, 1996, the coverage was $5,500,000 excess $500,000 and
the Company received a percentage of the profit, if any, on the treaty in the
form of contingent commission. Contingent commissions in the amount of
$3,287,000, $2,226,000 and $366,000 were recognized under the profit sharing
provisions of the treaty for the years ended December 31, 1996, 1995 and 1994,
respectively.
<PAGE>
In conjunction with the change in reinsured limits effective October 1, 1996
the Company, effective January 1, 1997, entered into an aggregate stop-loss
treaty with Underwriters Reinsurance Company (Barbados), Inc. This contract
covers approximately $5,000,000 of losses and allocated loss adjustment expenses
on the surety lines of business in excess of 25.86% of net earned premiums, with
an option to increase the coverage by up to $5,000,000 by payment of $1,000,000
prior to the incurrance of $2,500,000 in ceded losses under the original treaty.
The Company also maintains a semiautomatic bond facultative reinsurance
contract for surety bonds. The contract also applies to most types of bonds the
Company writes with single bond penalty limits up to $10,000,000 or multiple
bonds under a specific aggregate work program per principal with limits up to
$20,000,000 for contract surety bonds and $25,000,000 for commercial surety
bonds. The Company's retention under the contract is $6,000,000 plus 12% of the
reinsured amount. The Company's aggregate retention is additionally reinsured by
the aforementioned excess of loss reinsurance treaty, further limiting the
Company's net exposure.
The Company's insurance subsidiaries also issue contract bonds under the SBA
Surety Guarantee Program. Industry practice is to account for SBA guarantees as
reinsurance transactions. The purpose of the SBA Surety Guarantee Program is to
assist small contractors, who have not established credit or who fail to meet a
surety's normal underwriting standards, in obtaining bonds. An SBA guarantee
covers between 80% and 90% of the surety's liability up to $1,250,000 per bond.
For its liability lines of business, the Company has reduced its exposure on
any one risk with the purchase of excess of loss reinsurance. The net retained
amount has varied by year, primarily based on the Company's surplus position.
Currently, the Company retains the first $400,000 on any one risk with the next
$600,000 ceded to a consortium of reinsurers led by Gerling Global Reinsurance
Corporation. The Company participates in this treaty with a 10% share. The
Company further reinsures $1,000,000 in excess of $1,000,000 for its liability
coverages including extra contractual obligations and excess of policy limits
exposures.
For its property coverages, the Company generally retains the first $200,000
on any one exposure and purchases excess of loss reinsurance for $4,800,000 in
excess of $200,000. Limits relating to its Hawaiian homeowners program differ
from the above with the Company retaining $500,000 ultimate on each net loss
with the Company reinsuring $1,250,000 in excess of $500,000. The Company
participates in the Hawaii Hurricane Relief Fund, and accordingly, its Hawaiian
policies exclude wind coverage over 75 miles per hour.
RESERVES
The Company maintains reserves for losses and loss adjustment expenses with
respect to both reported and unreported claims. The amount of loss reserves for
reported claims, including related loss adjustment expense reserves, is
generally based upon a case-by-case evaluation of the type of loss. In
evaluating reserves for surety losses and loss adjustment expenses, the Company
considers a number of factors including an estimate of the costs to complete the
project, outstanding obligations to subcontractors, suppliers and the like and
prevailing case law and regulations pertaining to the underlying exposures. The
Company also considers the financial strength of the principal, possible offsets
to the claimed amount and defenses available to the principal and the Company.
The Company may use outside attorneys and construction consultants throughout
the reserving process. All reserves for reported claims are net of anticipated
collateral and other non-reinsurance recoveries. Reserves for incurred but not
reported claims are based on Company experience. An amount is included in the
reserves for unallocated loss adjustment expenses consisting of the costs for
the Company's claims, legal and subrogation departments to settle claims
incurred prior to year end.
<PAGE>
The loss settlement period on most of the Company's insurance claims is
relatively short. Nevertheless, it is often necessary to adjust estimates of
liability on a claim either upward or downward between the time a claim is
reported and the time of payment. There are inherent uncertainties in estimating
reserves, therefore, actual losses and loss adjusting expenses may deviate,
perhaps substantially, from reserves on the accompanying consolidated financial
statements, which could have a material adverse effect on the Company's
financial condition and results of operations. The Company does not discount its
claim reserves for financial reporting purposes. While the Company may make
implicit provisions for inflation or increasing costs in establishing reserves
for known claims, the relatively short claim to payment period and the nature of
the insured losses makes provisions for inflation or increasing costs generally
unnecessary.
The following table sets forth a reconciliation of the statutory liability
for losses and loss adjustment expenses (1) for the periods shown:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
(Dollars in thousands)
------------------------------------------
<S> <C> <C> <C>
Statutory liability for losses and loss adjustment expenses at
beginning of year $24,246 $26,584 $28,502
Provision for losses and loss adjustment expenses occurring in
current year 45,853 35,508 30,400
Increase (decrease) in estimated losses and loss adjustment expenses
for claims occurring in prior years 794 (243) (1,663)
Losses and loss adjustment expense payments for claims occurring during:
Current year (21,638) (19,283) (14,795)
Prior years (13,379) (18,320) (15,860)
------------- -------------- -------------
Statutory liability for losses and loss adjustment expenses at end
of year $35,876 $24,246 $26,584
============= ============== =============
<FN>
(1) Amounts reflect the liability for losses and loss adjustment expenses
net of reinsurance recoverable on unpaid loss and loss adjustment
expenses.
</FN>
</TABLE>
<PAGE>
The table on page 10 discloses the cumulative development of unpaid losses
and loss adjustment expenses of the Company from 1986 through 1996. The top line
of this table depicts the estimated net liability for unpaid losses and loss
adjustment expenses recorded at the balance sheet date for each of the indicated
years. This liability represents the estimated net amount of losses and loss
adjustment expenses for claims arising in all prior years that are unpaid at the
balance sheet date, including losses that had been incurred but not reported to
the Company. The lower portion of the table shows the re-estimated amount of the
previously recorded net liability based on experience as of the end of each
succeeding year. Estimated gross liability and the re-estimated amount of
previously recorded gross liability for the four years ended December 31, 1995
are shown below the table.
The increase or decrease in estimated losses and loss adjustment expenses
for losses occurring in prior years reflects the net effect of the resolution of
losses for other than full reserve value and subsequent readjustment of loss
values as of December 31st of the applicable years.
The difference between the reserves reported in the Company's consolidated
financial statements prepared in accordance with generally accepted accounting
principles ("GAAP") and those reported in the annual statements filed with the
State Departments of Insurance in accordance with statutory accounting
principles ("SAP") is as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
(Dollars in thousands)
------------------------------------------
<S> <C> <C> <C>
Reserves reported on a SAP basis $35,876 $24,246 $26,584
Net reinsurance recoverable on unpaid loss and
loss adjustment expenses 6,133 7,669 8,069
------------- -------------- -------------
Reserves reported on a GAAP basis $42,009 $31,915 $34,653
============= ============== =============
</TABLE>
In accordance with Financial Accounting Standards Board Statement No. 113,
Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts, reinsurance recoverable on unpaid losses and loss adjustment expenses
are reported for generally accepted accounting practices as assets rather than
netted against the corresponding liability for such items on the balance sheet.
Since these recoverable balances are netted against the losses and loss
adjustment expense liability for statutory purposes, a SAP/GAAP difference
results.
The Company attempts to estimate reserves that are adequate and neither
deficient nor redundant. Therefore, no meaningful evaluation of estimated future
redundancies or deficiencies can be developed from the Company's prior
experience. The cumulative "redundancy/(deficiency)" shown in the table on page
10 represents the aggregate change in the estimates over prior years. For
example, the 1991 liability has developed a $6,485,000 redundancy over five
years. That amount has been reflected in income over the five years. The effect
on income for the past three years of changes in estimates of the liabilities
for losses and loss adjustment expenses is shown in the reconciliation table on
page 8. The cumulative redundancy or (deficiency) as of the end of any year is
due to a re-evaluation of reserves established in prior years at less than or
more than the reserved values as of that date.
<PAGE>
<TABLE>
<CAPTION>
CUMULATIVE LOSS DEVELOPMENT
December 31,
(Dollars in thousands)
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for losses
& loss adjustment $2,292 $3,072 $3,528 $13,169 $23,199 $23,269 $24,860 $28,641 $26,584 $24,246 $35,876
expenses
Net paid (cumulative) as
of:
One year later 1,769 2,108 4,000 5,426 9,892 9,826 11,224 15,862 18,318 13,379 -
Two years later 2,017 3,461 4,021 8,146 14,386 14,473 16,896 23,547 24,579
Three years later 2,088 3,394 3,915 9,301 17,057 16,464 18,576 26,659
Four years later 2,065 3,436 3,693 10,996 18,261 16,654 18,902
Five years later 1,903 3,352 3,723 11,642 17,976 16,795
Six years later 1,801 3,419 4,519 11,646 18,074
Seven years later 1,868 3,348 4,425 11,583
Eight years later 1,830 3,325 4,318
Nine years later 1,819 3,221
Ten years later 1,793
Net liability re-estimated as of:
One year later 2,462 2,886 5,513 12,247 20,580 20,560 21,937 26,860 26,343 25,040 -
Two years later 2,114 3,618 4,650 10,463 18,890 18,401 19,565 25,943 28,540
Three years later 2,198 3,955 3,809 11,071 18,871 17,810 18,695 27,699
Four years later 2,207 3,485 4,020 11,622 18,654 16,664 19,048
Five years later 1,845 3,375 4,050 11,706 17,982 16,784
Six years later 1,811 3,431 4,483 11,628 17,943
Seven years later 1,868 3,341 4,429 11,542
Eight years later 1,830 3,325 4,319
Nine years later 1,819 3,221
Ten years later 1,793
Net Reserve Redundancy
(Deficiency): $499 ($149) ($791) $1,627 $5,256 $6,485 $5,812 $942 ($1,956) ($794) -
==========================================================================================================
Net redundancy
(deficiency) as a
percent of original 22% (5%) (22%) 12% 23% 28% 23% 3% (7%) (3%) -
net liability:
==========================================================================================================
Gross liability for losses & loss adjustment 35,150 46,614 34,653 31,915 42,009
expenses
Ceded liability for losses & loss adjustment (10,290) (17,973) (8,069) (7,669) (6,133)
expenses
----------------------------------------------------
Net liability for losses & loss adjustment 24,860 28,641 26,584 24,246 35,876
expenses
====================================================
Gross liability re-estimated 30,128 41,084 39,591 31,358
Ceded liability re-estimated (11,080) (13,385) (11,051) (6,318)
------------------------------------------
Net liability re-estimated 19,048 27,699 28,540 25,040
==========================================
Gross Reserve Redundancy (Deficiency) 5,022 5,530 (4,938) 557
==========================================
<FN>
Note 1: The Company allocates salvage and subrogation recoverable
balances by calendar year based on its best estimate of the years for which the
accrued salvage and subrogation relates.
</FN>
</TABLE>
<PAGE>
INVESTMENTS
The Company's primary investment objectives are the protection and long-term
enhancement of surplus, flexibility to respond to changing business conditions
and the maximization of after-tax total return consistent with the Company's
business objectives. The Company has investment management agreements with two
firms to manage a significant part of the Company's investment portfolio. The
Company pays each investment manager a quarterly fee based on the market value
of the portfolio managed. The Company's arrangement with each investment manager
is terminable by either party on 60 days prior notice. With respect to each of
the investment mangers, investment guidelines have been established. These
guidelines establish limits for maturity risk, quality risk and diversification
risk. Guidelines are also established for investment grades, issue size and
effective portfolio duration.
Certain states or territories require the Company to deposit securities
issued by such states or territories as a condition of licenser. These
securities are managed in-house in accordance with guidelines established by the
various states and territories. At December 31, 1996, the market value of all
state deposits was approximately $12,561,000.
<PAGE>
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
(Dollars in thousands)
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed maturities, held-to-maturity, at
amortized cost:
Bonds:
U.S. Government $ -- $ -- $ 10,850 $ 9,903 $ 12,859
Mortgage backed securities -- -- 696 -- --
States, municipalities and political
subdivisions -- -- 3,524 2,921 21,262
Certificates of deposit, at cost -- -- 50 50 2,178
-------- -------- -------- -------- --------
Total -- -- 15,120 12,874 36,299
-------- -------- -------- -------- --------
Fixed maturities, available-for-sale, at
market (1):
Bonds:
U.S. Government 13,739 32,101 14,292 19,931 47,467
Asset backed securities 4,004 5,636 -- -- --
Mortgage backed securities 24,245 17,723 27,904 7,845 --
States, municipalities and political
subdivisions 26,608 34,952 34,374 54,141 20,760
Other 27,848 20,284 22,080 18,193 3,189
Redeemable preferred stock, at market (1) 6,050 6,495 8,280 7,641 3,305
-------- -------- -------- -------- --------
Total 102,494 117,191 106,930 107,751 74,721
-------- -------- -------- -------- --------
Total fixed maturities 102,494 117,191 122,050 120,625 111,020
Common equity securities, at market (1) 9,779 8,689 7,386 5,737 3,150
Preferred equity securities, at market (1) 4,253 3,592 2,321 2,998 1,195
Other invested assets 2,849 797 -- -- --
Short-term investments, at cost 890 745 2,289 1,849 1,174
-------- -------- -------- -------- --------
Total investments 120,265 131,014 134,046 131,209 116,539
Interest bearing cash equivalents (2) 6,434 5,232 4,032 7,103 11,088
-------- -------- -------- -------- --------
Total investments and cash equivalents $126,699 $136,246 $138,078 $138,312 $127,627
======== ======== ======== ======== ========
<FN>
(1) Market value is principally determined by quotations on national
securities exchanges. When national securities exchange quotes are not
available, quotations are determined by the Company's investment advisors.
(2) These amounts represent gross invested bank balances.
</FN>
</TABLE>
During 1993, the Company adopted Financial Accounting Standards Board
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, which requires investments to be classified in one of three
categories: held-to-maturity securities, available-for-sale securities and
trading securities. Because such securities had already been appropriately
classified as discussed above, there was no affect to the consolidated financial
statements in 1993.
During the fourth quarter of 1995 the Company concluded that it would no
longer commit to holding any security to maturity, as this limited management
from responding to changes in circumstances and perceived economic trends and it
would no longer participate in the active trading of any portion of its
portfolio. Accordingly, all invested amounts have been classified at December
31, 1996 and 1995 as available for sale.
The Company's investment results, pre-tax investment yields and effective
yields for the periods indicated were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994 1993 1992
Investment Results: (Dollars in thousands)
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average invested assets (includes
short-term investments) $131,473 $137,162 $138,195 $132,970 $118,986
Net investment income 6,807 7,863 7,337 6,430 7,063
Average annual return on investments 6.14% 14.01% (0.72%) 8.91% 7.21%
Average annual yield on investments:
Fixed maturities 5.83% 6.15% 5.93% 5.51% 6.17%
Equity securities 3.11 4.53 2.32 3.73 26.94
Short-term investments 41.35 33.55 19.38 24.21 3.62
------------- ------------- ------------- ------------- -------------
Effective yield total investments 5.44 6.10 5.65 5.26 6.22
Less investment expense (0.26) (0.37) (0.34) (0.42) (0.28)
============= ============= ============= ============= =============
Total investment yield 5.18% 5.73% 5.31% 4.84% 5.94%
============= ============= ============= ============= =============
<FN>
(1) The effective tax rates for the periods shown above are only those effective tax rates applicable to investment income
for the corresponding periods
(2) Average annual return is net investment income, realized gains (losses)
and the change in unrealized gains (losses) divided by average invested
assets. The effective tax rates used for average annual return are the
effective tax rates applicable to net investment income, realized gains
(losses) and the change in unrealized gains (losses) for the
corresponding periods.
</FN>
</TABLE>
<PAGE>
The maturity distribution of the Company's fixed maturity investments at
December 31, 1996 was as follows:
Amortized Cost Estimated
Market Value
Fixed maturities due: (Dollars in thousands)
-----------------------------------
Within 1 year $ 4,235 $ 4,217
Beyond 1 year but within 5 years 47,667 48,023
Beyond 5 years but within 10 years 28,440 28,561
Beyond 10 years but within 20 years 13,905 14,010
Beyond 20 years 7,552 7,683
----------------- -----------------
$ 101,799 $ 102,494
================= =================
MARKETING AND GROWTH
The Company markets its surety bond products in 50 states, the District of
Columbia, Guam and Puerto Rico through approximately 9,000 independent agents
and brokers. California constituted 20.8% and 22.4% of surety premiums written
for the years ended December 31, 1996 and 1995, respectively.
The Company also accepts surety business on a direct basis (i.e., without
the assistance of an agent). For the years ended December 31, 1996 and 1995,
direct business accounted for 4.3% and 4.6%, respectively, of surety premiums
written.
The Company directs its specialty property and casualty marketing efforts
primarily at independent insurance producers. At December 31, 1996, the total
number of producers placing coverage with Condor was 123, of which 82 represent
California business and 41 represent Arizona business. Such producers are made
aware of the coverages offered by Condor primarily through direct mailing and
advertisements in trade publications and trade shows.
THE SAFETY ASSOCIATION
The Company's subsidiary, Condor, offers its monthly commercial automobile
insurance policies to members of the Waste Industry Loss Prevention and Safety
Association (d.b.a. "The Safety Association"). The Safety Association was formed
in 1981 to enhance the availability of insurance for and provide services aimed
at improving operational safety to the industries to which Condor provides
insurance. One of the directors and executive officers of the Company is an
officer, director and shareholder of The Safety Association. The Safety
Association employs five field safety specialists who are responsible for
inspecting members' fleets and facilities and providing safety engineering and
loss prevention advice and aids to members, including videos and bi-monthly
newsletters. The Company believes that the activities of the field safety
specialists enhance loss prevention and risk experience.
<PAGE>
COMPETITION
The insurance industry is a highly competitive industry. There are numerous
firms, particularly in the specialty markets, which compete for a limited volume
of business. Competition is based upon price, service, products offered and
financial strength of the insurance company. There are a number of companies in
the industry which offer packages and policies similar to the Company's.
The largest surety company in the country has less than six percent of the
total surety market. The top ten companies collectively have less than half of
the total market. The industry is growing at an annual rate of only about three
percent which has intensified the competition within the industry.
The Company primarily competes for surety business in the specialty market
which is dominated by small, regional companies. However, some of the national,
standard market companies have begun to pursue specialty market business.
Pricing, service and agent commissions are the primary competitive tools. The
Company has positioned itself to be competitive in pricing and agent
commissions, but strives to exceed its major competitors in the quality of its
service. The Company believes that its branch service network and expertise in
the specialty surety niche will enable it to compete effectively, even when
challenged by the larger, better capitalized, standard market companies.
The Company's strategy for its specialty property and casualty business
generally is to position itself within a limited regional geographic location as
a consistent and reliable provider of commercial insurance packages for insureds
involved in specialized industries.
The Company believes that its monthly direct-bill commercial policies create
a competitive advantage because the insured is not required to finance an annual
premium. Additionally, the Company believes that its ability to provide a
consistent insurance package for specialized industries and to continue to
provide quality service in the handling of claims through staff who are
particularly experienced in the areas of the Company's specialization permit it
to compete successfully in its targeted customer base. The Company's direct
billing also enables insurance producers to enjoy the benefits of a monthly
commission without incurring the cost of billing and the attendant problems
relating to premium collection.
EMPLOYEES
At December 31, 1996, the Company employed 479 people.
GOVERNMENT REGULATION
During 1995, two of the Company's wholly owned insurance subsidiaries,
Amwest Surety and Far West redomesticated from California to the State of
Nebraska, in part to reduce the Company's premium tax expenses. The Company's
other insurance subsidiary, Condor, remains a California domiciled company. The
redomestication had no impact on the Company's physical location, but does
affect the ongoing regulation of the insurance subsidiaries and the Company.
Subsequent to the redomestication, the Company became regulated by the Nebraska
Department of Insurance as an insurance holding company because it controls two
Nebraska domiciled insurance companies. Any person who acquires or agrees to
acquire an amount of the Company's Common Stock which would cause him to own
beneficially more than 10% of such stock must obtain the prior approval of the
Nebraska Insurance Commissioner.
<PAGE>
The Company's insurance subsidiaries are required to file with the
Department of Insurance in their state of domicile information concerning
ownership, financial condition, capital structure and general business
operations. The Company's insurance subsidiaries can only conduct business in
states in which they are licensed. Each of the insurance subsidiaries are
subject to varying degrees of regulation and supervision in the states in which
they conduct business. This regulation relates to such matters as the adequacy
of reserves, the type and quality of investments, minimum capital and surplus
requirements, risk-based capital requirements, deposit of securities with state
insurance authorities for the benefit of policyholders, restrictions on
dividends, periodic examination of the insurers' affairs, claims handling
procedures, and annual and other reports required to be filed with the state
insurance commissioners on the financial and other condition of these companies.
The subsidiaries must also file rates with most of the states in which they are
licensed to underwrite insurance.
The Company's insurance subsidiaries are also subject to triennial
examinations of their financial condition by their state of domicile. Condor is
currently under examination by the State of California and a report is expected
in early 1997. Management does not believe any findings in the examiners report
will be material to the financial position of Condor at December 31, 1996.
Amwest Surety and Far West were last examined in 1993.
Amwest Surety and Far West are also regulated by the United States
Department of the Treasury as acceptable sureties for Federal bonds. During
1994, the Department of the Treasury changed its minimum requirement for bonding
Federal obligations from $25,000 to $100,000. This change could reduce the
number of Federal bonds written, however, the Company believes that it has not
and will not have a material affect on the Company's business.
Condor is a participant in California's "assigned risk" program as it
relates to commercial automobile liability insurance. Automobile liability
insurers in California are required to sell bodily injury liability to a
proportionate number (based on the insurer's share of the California automobile
casualty insurance market) of those drivers applying to the California
Department of Insurance for placement as assigned risks. Drivers seek placement
as assigned risks because their driving records or other relevant
characteristics make them difficult to insure in the open market.
See discussion regarding Proposition 103 at Item 3 - "Legal Proceedings."
ITEM 2. PROPERTIES
The Company leases all of its office space which, as of December 31, 1996,
totaled approximately 156,000 square feet. The home office aggregates
approximately 53,000 square feet. In addition, the Company leases and subleases
approximately 18,000 square feet of office space in the same building as home
office. Branch locations range from 270 to 4,600 square feet. See Note 12 of
Notes to Consolidated Financial Statements.
On January 26, 1996, the Company entered into a lease agreement for new home
office space in the City of Calabasas, located approximately 7 miles from its
current home office. The expected occupancy date for this office space is June
1997. The lease term is for a period of 15 years and covers approximately 63,000
square feet. The Company also has the option to purchase this new home office
building and land three years into the lease period at a predetermined rate for
the building, with the value of land based on then existing market rates.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time named as a defendant in various lawsuits
incidental to its business. Listed below are recent developments in certain
legal proceedings involving the Company or its insurance subsidiaries:
Proposition 103 - California voters passed Proposition 103, an insurance
initiative which required a rollback in insurance rates for policies (and bonds)
written or renewed during the twelve month period beginning November 8, 1988 and
provided that changes in insurance premiums after November 8, 1988 must be
submitted for approval of the California Insurance Commissioner prior to
implementation. While the Proposition has the most significant impact on
automobile insurance, its provisions, as written, also apply to other property
and casualty insurers including surety insurers.
On August 26, 1990, the State of California enacted Insurance Code Section
1861.135 ("Section 1861.135") exempting surety insurance from the rate rollback
and prior approval provisions of Proposition 103. Section 1861.135 does not
affect Proposition 103's prohibition against excessive, inadequate or
discriminatory rates. Due to the enactment of Section 1861.135, the Company
terminated a previously established reserve for potential premium rebates.
Subsequently, the Department of Insurance ("Department") and Voter Revolt
brought a motion for writ of mandate challenging the validity of Section
1861.135. On March 21, 1991, the Los Angeles Superior Court concluded that
Section 1861.135 did not violate the California Constitution or provisions of
Proposition 103. The Department and Voter Revolt appealed. On December 7, 1993,
the Second District Court of Appeal overturned Section 1861.135 by a 2-1 vote.
On February 24, 1994, the California Supreme Court agreed to hear the Company's
petition for review, thereby staying the Court of Appeals opinion. On December
14, 1995, the Supreme Court of the State of California affirmed the decision of
the Second District Court of Appeal, overturning Insurance Code Section
1861.135, which exempted the surety insurance industry from major provisions of
Proposition 103. Accordingly, the Company is no longer exempted from the rate
rollback and prior approval provisions contained in Proposition 103. The Company
accrued $2,000,000 during the quarter ended December 31, 1995 representing the
Company's best estimate of its rollback obligations pursuant to Proposition 103.
On August 15, 1996, the Company entered into a Stipulation and Consent Order
with the Insurance Commissioner of the State of California which requires the
Company's insurance subsidiaries to pay $1,928,370 in full payment of their
Proposition 103 liabilities. The Proposition 103 refund checks were issued by
the subsidiaries in January 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock has been traded on the American Stock Exchange
under the symbol AMW since June 25, 1987 and on the Pacific Stock Exchange under
the symbol AMW since April 21, 1988. The following table sets forth, for the
periods indicated, the high and low sale prices per share as reported on the
American Stock Exchange. This table also sets forth the amount per share of cash
dividends paid by the Company with respect to its Common Stock for each of the
indicated periods.
Period High Low Dividends
- ------ ---- --- ---------
1994
First Quarter $14 1/2 $12 $.09
Second Quarter 14 1/4 12 1/2 .09
Third Quarter 13 7/8 12 1/8 .09
Fourth Quarter 12 3/8 11 1/8 .09
1995
First Quarter 15 1/4 11 3/4 .10
Second Quarter 15 14 1/8 .10
Third Quarter 15 1/8 14 1/4 .10
Fourth Quarter 18 1/4 14 7/8 .10
1996
First Quarter 15 3/8 13 3/8 .11
Second Quarter 13 7/8 11 3/4 .11
Third Quarter 12 1/2 11 1/2 .11
Fourth Quarter 13 3/4 11 1/4 .11
On March 27, 1997, the closing price of the Company's Common Stock on the
American Stock Exchange was $12.125 per share.
HOLDERS
As of March 27, 1997, there were 341 holders of record of the Company's
Common Stock. However, based on available information, the Company believes
that the total number of stockholders, including beneficial stockholders,
exceeds 1,000.
DIVIDENDS
The Company began paying cash dividends in 1986. The Company's ability to
pay cash dividends is subject to certain regulatory and contractual
restrictions. See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and Notes
8 and 10 of Notes to Consolidated Financial Statements.
In addition to regulatory and contractual restrictions, the payment, amount
and timing of future dividends by the Company will depend upon the Company's
operating results, overall financial condition, capital requirements and general
business condition, as well as other factors deemed relevant by the Board of
Directors.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected data presented on page 20 under the captions "Summary of
Earnings," "Year End Financial Position" and "Operating Ratios" for, and as of
the end of, each of the years in the five year period ended December 31, 1996,
are derived from the consolidated financial statements of Amwest Insurance
Group, Inc. and subsidiaries, which financial statements have been audited by
KPMG Peat Marwick LLP, independent certified public accountants. The
consolidated financial statements as of December 31, 1996 and 1995 and for each
of the years in the three year period ended December 31, 1996 and the report
thereon, are included elsewhere in this Annual Report on Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Year ended December 31,
1996 1995 1994 1993 1992
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Earnings:
Net premiums earned $ 87,883 $ 85,170 $ 81,289 $ 72,085 $ 63,543
Underwriting expenses 97,712 89,644 80,960 73,663 62,666
Underwriting income (loss) (9,829) (4,474) 329 (1,578) 877
Net investment income 6,807 7,863 7,337 6,430 7,063
Realized gains (losses) 2,201 2,176 65 2,331 950
Income (loss) before income taxes and
extraordinary item (5,046) 4,498 6,393 4,948 6,322
Provision for income taxes (2,360) 829 1,352 1,001 1,297
Income before extraordinary item (2,686) 3,669 5,041 3,947 5,025
Extraordinary item - - - (249) -
Net income $ (2,686) $ 3,669 $ 5,041 $ 3,698 $ 5,025
===============================================================================
Per share:
Income before extraordinary item $ (.80) $ 1.10 $ 1.50 $ 1.20 $ 1.55
Extraordinary item - - - (.08) -
Net income $ (.80) $ 1.10 $ 1.50 $ 1.12 $ 1.55
===============================================================================
Dividends $ 0.44 $ 0.40 $ 0.36 $ 0.28 $ 0.28
===============================================================================
Weighted average number of shares
outstanding 3,350 3,341 3,350 3,299 3,251
===============================================================================
Year End Financial Position:
Total investments $ 120,265 $ 131,014 134,047 131,209 116,539
Total assets 181,418 183,833 186,863 195,856 161,005
Bank indebtedness 12,500 12,500 12,500 12,500 12,264
Total stockholders' equity 49,932 55,075 46,157 48,347 42,184
Average stockholders' equity 52,504 50,616 47,252 45,266 39,973
Return on stockholders' equity (5.12%) 7.25% 10.67% 8.17% 12.57%
Operating Ratios:
Loss & loss adjustment expenses 53.08% 41.41% 35.35% 39.49% 32.86%
Policy acquisition costs 43.66% 44.70% 45.03% 40.13% 43.92%
General operating expenses 14.45% 16.80% 19.21% 19.98% 21.85%
Other operating expenses - 2.35% - 2.59% -
Combined ratios 111.18% 105.25% 99.60% 102.19% 98.62%
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On March 14, 1996, the Company merged with Condor Services, Inc. in a
transaction accounted for as a pooling of interests (the "Merger").The following
analysis has been prepared as if Condor Services, Inc. ("CSI") were wholly owned
for all periods presented herein.
RESULTS OF OPERATIONS
Year ended December 31, 1996 compared to year ended December 31, 1995
Premiums written increased 3.3% from $94,184,000 in 1995 to $97,242,000 in
1996. The increase in premiums written is attributable primarily to court
probate bonds subsequent to the Company's acquisition of Southern California
Bonding, Inc. in March of 1996.
Net premiums earned increased 3.2% from $85,170,000 in 1995 to $87,883,000
in 1996. The increase in net premiums earned reflects the increased premium
writings.
Net losses and loss adjustment expenses increased 32.3% from $35,265,000 in
1995 to $46,647,000 in 1996. This resulted in an increase in the loss and loss
adjustment expense ratio from 41.4% in 1995 to 53.1% in 1996. The increased loss
ratio is primarily attributable to an increase in the loss and loss adjustment
expense ratio for contract performance and payment bonds from 40.3% in 1995 to
52.9% in 1996 as well as adverse loss experience on the Company's private
passenger automobile program in the State of Arizona. The loss ratio on contract
performance and payment bonds was negatively impacted by increased severity
caused by a number of large losses reported in 1996. Such losses were not
limited to any one geographic area. The adverse loss development on private
passenger business in Arizona is due to general rate inadequacy for that
program.
Policy acquisition costs as a percentage of net premiums earned decreased
from a ratio of 44.7% or $38,070,000 in 1995 to 43.7% or $38,367,000 in 1996.
The relatively constant ratio reflects the costs associated with producing
contract and commercial surety business through the Company's network of 30
branch offices, as well as commissions and premium taxes on the Company's other
product lines.
General operating costs also decreased as a percentage of net premiums
earned from 16.8% or $14,309,000 in 1995 to 14.5% or $12,698,000 in 1996. The
decrease in the actual amount of general operating costs is primarily
attributable to significantly reduced bonus accruals in 1996 due to the
Company's 1996 results as well as efficiencies related to the merger between the
Company and Condor Services, Inc. which occurred in March of 1996.
On December 14, 1995 the Supreme Court of the State of California affirmed
the decision of the Second District Court of Appeal overturning Insurance Code
Section 1861.135 which exempted the surety insurance industry from major
provisions of proposition 103. Accordingly the Company is no longer exempted
from the rate rollback and prior approval provisions contained in Proposition
103. The Company accrued $2,000,000 during the quarter ended December 31, 1995.
On August 15, 1996, the Company entered into a Stipulation and Consent Order
with the Insurance Commissioner of the State of California which required the
Company's insurance subsidiaries to pay $1,928,370. The Proposition 103 refund
checks were issued in January 1997.
The Company's underwriting loss increased from $4,474,000 for the year ended
December 31, 1995 to $9,829,000 for the year ended December 31, 1996. The
combined ratio increased from 105.3% in 1995 to 111.2% in 1996. The increase in
the underwriting loss is primarily attributable to increased losses on the
contract performance and payment bond and Arizona private passenger automobile
lines of business as discussed above.
<PAGE>
Interest expense decreased 5.4% from $1,056,000 in 1995 to $999,000 in 1996
due to an decrease in the average interest rate on the bank indebtedness. The
$12,500,000 in outstanding indebtedness has a variable rate which averaged 7.8%
during 1995 but decreased to an average rate of 7.4 % during 1996 due to
fluctuations during 1996 in the London Interbank Offered Rate (LIBOR) which is
used as the benchmark for the Company's rate on bank indebtedness. The interest
rate on the Company's bank indebtedness at December 31, 1996 was 6.88 %.
Collateral interest expense decreased 28.3% from $1,698,000 in 1995 to
$1,218,000 in 1996. This decrease is attributed to an overall reduction in funds
held as collateral during 1996. At December 31, 1995 and 1996, the collateral
balances accrued interest daily at an average rate of 3.5% and 3.8% per annum,
respectively.
Net investment income and realized investment gains decreased 10.3% from
$10,039,000 in 1995 to $9,008,000 in 1996. This decrease is primarily due to a
decrease in the amount of invested assets from $131,014,000 at December 31, 1995
to $120,265,000 at December 31, 1996. Average annual yield on investments
decreased from 5.7% in 1995 to 5.2% in 1996. Realized investment gains amounted
to $2,176,000 during 1995 compared to $2,201,000 during 1996.
Other revenue decreased 99.8% from $797,000 in 1995 to $2,000 in 1996.
Included in this number for 1995 is revenue earned from independent third
parties by the Company's subsidiary, Raven Claims Services. During 1996, the
Company performed minimal loss adjusting activities for outside sources.
Merger expenses of $710,000 was incurred in 1996 in connection with the
Merger of CSI with and into Amwest Insurance Group, Inc. Subsequent to the
Merger, the separate existence of CSI ceased. The Merger has been accounted for
as a pooling of interests.
Lease termination costs of $1,300,000 were incurred in 1996 in connection
with the signing of a definitive agreement to terminate the Company's lease at
its Corporate headquarters prior to its scheduled termination in August 1998.
The Company's lease at its current headquarters will now terminate on June 30,
1997 at which time the Company intends to occupy a new facility in Calabasas,
California at significantly reduced rental rates.
Income (loss) before income taxes decreased from income of $4,498,000 in
1995 to a loss of $5,046,000 in 1996 due to the factors outlined above.
The effective tax rate was 18.4% for the year ended December 31, 1995. The
effective rate of the tax benefit for 1996 is 46.8%. The primary reason for the
variance from the corporate income tax rate of 34% is tax advantage income
received on a portion of the Company's investment portfolio.
Net income (loss) decreased from income of $3,669,000 in 1995 to a loss of
$2,686,000 in 1996 due to the factors outlined above.
<PAGE>
Year ended December 31, 1995 compared to year ended December 31, 1994
Premiums written remained relatively flat at $94,222,000 in 1994 as compared
to $94,184,000 in 1995. No product line had significant changes in written
premium from 1994 to 1995.
Net premiums earned increased 4.8% from $81,289,000 in 1994 to $85,170,000
in 1995. The increase in net premiums earned reflects the increased premium
writings in the latter half of 1994 which were earned during 1995. The Company
earns premiums ratably over the estimated bond and/or policy terms.
Net losses and loss adjustment expenses increased 22.7% from $28,737,000 in
1994 to $35,265,000 in 1995. This resulted in an increase in the loss and loss
adjustment expense ratio from 35.5% in 1994 to 41.4% in 1995. The increased loss
ratio is primarily attributable to an increase in the loss and loss adjustment
expense ratio on the contract performance and payment bond product line from
26.0% in 1994 to 40.3% in 1995. The loss ratio on contract performance and
payment bonds was negatively impacted by increased severity caused by a number
of large losses reported in 1995. Such losses were not limited to any one
geographic area.
Policy acquisition costs as a percentage of net premiums earned remained
relatively constant at a ratio of 45.0% or $36,607,000 in 1994 as compared to
44.7% or $38,070,000 in 1995.
General operating costs also decreased as a percentage of net premiums
earned from 19.2% or $15,616,000 in 1994 to 16.8% or $14,309,000 in 1995. The
decrease in the actual amount of general operating costs is primarily
attributable to earthquake related charges and a loss on subleasing a portion of
the Company's headquarters during 1994. No such charges were incurred during
1995.
Underwriting income (loss) decreased from income of $329,000 for the year
ended December 31, 1994 to an underwriting loss of $4,474,000 for the year ended
December 31, 1995. Excluding the Proposition 103 accrual, the Company would have
had an underwriting loss of $2,474,000 for the year ended December 31,1995. The
reason for the underwriting loss is a combination of the facts previously
discussed. The combined ratio increased from 99.6% in 1994 to 105.3% in 1995.
Interest expense increased 25.7% from $840,000 in 1994 to $1,056,000 in 1995
due to an increase in the interest rate on the bank indebtedness. The
$12,500,000 in outstanding indebtedness has a variable rate which averaged 6.7%
during 1994 but increased to an average rate of 7.8% during 1995 due to higher
average short term interest rates in 1995 versus 1994. The interest rate on the
Company's bank indebtedness at December 31, 1995 was 7.9375%. Collateral
interest expense decreased 11.6% from $1,921,000 in 1994 to $1,698,000 in 1995.
This decrease is attributed to an overall reduction in funds held as collateral
during 1995. At December 31, 1994 and 1995, the collateral balances accrued
interest daily at an average rate of 3.9% and 3.5% per annum, respectively.
Net investment income and realized investment gains (losses) increased 35.6%
from $7,402,000 in 1994 to $10,039,000 in 1995. This increase is primarily due
to an increase in realized gains on sales of investments from $65,000 in 1994 to
$2,176,000 in 1995. This change of $2,111,000 was augmented by slightly higher
yields on larger invested balances during 1995. Such higher yields were
predominately attributable to investments made prior to the general decline in
interest rates during 1995.
Income before income taxes decreased 29.6% from $6,393,000 in 1994 to
$4,498,000 in 1995 due to the factors outlined above. Excluding the Proposition
103 accrual income before income taxes increased to $6,498,000 in 1995. The
Company's net income for 1995 includes a one time recovery of $890,000 related
to previously misappropriated funds from Condor Insurance Company which was
acquired in March of 1996 in a transaction accounted for as a pooling of
interests.
<PAGE>
The effective tax rate was 21.2% for the year ended December 31, 1994 as
compared to 18.4% for the year ended December 31,1995 . The lower effective tax
rate in 1995 is attributed to a greater amount of income before income taxes
derived from tax-advantaged securities in 1995.
Net income decreased 27.2% from $5,041,000 in 1994 to $3,669,000 in 1995 due
to the factors outlined above. Excluding the accrual of the Proposition 103
premium refund net income decreased by 1.0% to $4,989,000.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had total cash and cash equivalents and
investments of $126,699,000. Included in these amounts is an aggregate of
$29,928,000 in funds held as collateral which are shown as a liability on the
Company's consolidated balance sheet. As of December 31, 1996, the Company's
investment balances were comprised of $102,494,000 in fixed maturities held at
market, $9,779,000 in common equity securities, $4,253,000 in preferred equity
securities, $2,849,000 in other invested assets and $890,000 in short-term
investments.
The Company's off balance sheet collateral which primarily consists of
irrevocable letters of credit and certificates of deposit declined from
$228,428,000 at December 31, 1995 to $215,315,000 at December 31, 1996. This
decrease is primarily attributable to competitive market conditions and a
decrease in contract performance and payment bond writings in 1996.
In addition, cash collateral declined from $37,650,000 at December 31, 1995
to $29,928,000 at December 31, 1996. The Company reflects in its consolidated
financial statements only funds received as collateral on which net earnings
inure to the benefit of the Company. The decline in this amount is primarily
attributed to decreased writings in those lines of business for which cash
collateral is generally accepted. These include contractor's license bonds and
sales tax bonds. The amount of cash collateral can also be impacted by the
timing and payment of claims activity related to draws on irrevocable letters of
credit and certificates of deposit.
Because the Company depends primarily on dividends from its insurance
subsidiaries for its net cash flow requirements, absent other sources of cash
flow, the Company cannot pay dividends materially in excess of the amount of
dividends that could be paid by the insurance subsidiaries to the Company. See
Note 8 of Notes to Consolidated Financial Statements.
On December 30, 1988, the Company borrowed $12,300,000 (the "1988 Loan")
pursuant to a credit agreement with Security Pacific National Bank of which
$10,000,000 was contributed on that date to the surplus of Amwest Surety. See
Note 10 of Notes to Consolidated Financial Statements.
On August 6, 1993, the Company entered into a revolving credit agreement
with Union Bank for $12,500,000 which refinanced the 1988 Loan. This loan was
amended on April 24,1995 and again on July 10, 1996 to increase the amount
available under the revolving line of credit from $12,500,000 to $15,000,000.
The loan has a variable rate based upon fluctuations in the London Interbank
Offered Rate (LIBOR) with amortizing principal payments beginning September 30,
1996 and maturing September 30, 2001. The interest rate at December 31, 1996 was
6.88%. The credit agreement contains certain financial covenants with respect to
capital expenditures, business acquisitions, liquidity ratio, leverage ratio,
tangible net worth, net profit and dividend payments.
<PAGE>
The Company is a party to a lease with Trillium/Woodland Hills regarding its
corporate headquarters. During 1996, the Company signed of a definitive
agreement to terminate the Company's lease at its Corporate headquarters prior
to its scheduled termination in August 1998. The Company's lease at its current
headquarters will now terminate on June 30, 1997. On January 26, 1996, the
Company entered into a lease agreement for new home office space in the City of
Calabasas, California. The expected occupancy date for this office space is June
1997. The lease term is for a period of 15 years and contains provisions for
scheduled lease charges. The Company's minimum commitment with respect to this
lease in 1997 is approximately $515,000. The Company also has the option to
purchase this new home office building and land three years into the lease
period at a predetermined rate for the building, with the value of land based on
then existing market rates. See Note 12 of Notes to Consolidated Financial
Statements.
Other than the Company's obligations with respect to funds held as
collateral, the Company's obligations to pay claims as they arise, the Company's
commitments to pay principal and interest on the bank debt, the Company's
obligation under Proposition 103 and lease expenses as noted above, the Company
has no significant cash commitments.
The Company believes that its cash flows from operations and other present
sources of capital are sufficient to sustain its needs for the remainder of
1997.
The Company generated $8,534,000, used $1,252,000 and generated $1,346,000
in cash from operating activities in the fiscal years ended December 31, 1994,
1995 and 1996, respectively. The Company used $12,394,000 and generated
$10,363,000 and $8,741,000 in cash for investing activities for the fiscal years
ended December 31, 1994, 1995 and 1996, respectively. The Company generated
$1,327,000, and used $10,143,000 and $8,885,000 in cash from financing
activities for the fiscal years ended December 31, 1994, 1995 and 1996,
respectively. The cash used for investing activities in 1994 was funded
principally by operating activities.
The effect of inflation on the revenues and net income of the Company during
all three periods discussed above was not significant.
Certain statements contained in this Form 10-K regard matters which are not
historical facts and are forward looking statements. Because such forward
looking statements include risks and uncertainties, actual results may differ
materially from those expressed in or implied by such forward looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to: A decline in demand for surety bonds or
specialty property and casualty insurance, the ineffectiveness of changes made
by management, a deterioration in results of any of the Company's product lines,
or a general economic decline. The Company undertakes no obligation to release
publicly the results of any revisions to these forward looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required in response to this section
are submitted as part of Item 14(a) of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding Directors and Executive Officers of the
Registrant, reference is made to the Registrant's definitive proxy statement for
its Annual Meeting of Stockholders to be held on May 30, 1997, which will be
filed with the Securities and Exchange Commission within 120 days after December
31, 1996, and which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For information regarding executive compensation, reference is made to the
Registrant's definitive proxy statement for its Annual Meeting of Stockholders
to be held on May 30, 1997, which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1996, and which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information regarding security ownership of certain beneficial owners
and management, reference is made to the Registrant's definitive proxy statement
for its Annual Meeting of Stockholders to be held on May 30, 1997, which will be
filed with the Securities and Exchange Commission within 120 days after December
31, 1996, and which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information regarding certain relationships and related transactions,
reference is made to the Registrant's definitive proxy statement for its Annual
Meeting of Stockholders to be held on May 30, 1997, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1996, and
which is incorporated herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
The index to the consolidated financial statements appears on page 38.
(b) Reports on Form 8-K
None.
(c) Exhibits
3.1 Restated Certificate of Incorporation of the Company as amended
to date. (Incorporated by reference to Exhibit 3(3)(a) to the
Company's Form 8-B Registration Statement No. 1-9580.)
3.2 Bylaws of the Company. (Incorporated by reference to Exhibit 3.2
of the Company's 1990 Form 10-K.)
4.1 Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 3(4) to the Company's Form 8-B Registration Statement
No. 1-9580.)
10.1 Lease Agreement dated April 1, 1986, by and between Amwest
Insurance Group, Inc. and Trillium/Woodland Hills.
(Incorporated by reference to Exhibit 10.9 to the Company's 1986
Form 10-K.)
10.2 First amendment to Lease Agreement dated January 30, 1987, by
and between Amwest Insurance Group, Inc. and
Trillium/Woodland Hills. (Incorporated by reference to Exhibit
10.13 to the Company's 1987 Form 10-K.)
10.3 Second amendment to Lease Agreement dated June 11, 1987, by and
between Amwest Insurance Group, Inc. and
Trillium/Woodland Hills. (Incorporated by reference to 10.14 to
the Company's 1987 Form 10-K.)
10.4 Third amendment to Lease Agreement dated September 1, 1988, by
and between Amwest Insurance Group, Inc. and
Trillium/Woodland Hills. (Incorporated by reference to Exhibit
10.15 to the Company's 1988 Form 10-K.)
10.5 Reinsurance Binder dated October 13, 1988 by and between Condor
Services, Inc. and Transamerica Reinsurance
Company (Incorporated by reference to Exhibit 10.8 to the Condor
Services, Inc. Registration Statement).
<PAGE>
10.6 Agreement for Semi-Automatic Facultative Reinsurance Agreement
by and between Condor Insurance Company and General Reinsurance
Corporation (Incorporated by reference to Exhibit 10.11 to the
Condor Services, Inc.
Registration Statement).
10.7 Memorandum of Reinsurance dated October 23, 1989, as amended by
Addendum Number 1 dated December 21, 1989 and Addendum Number 2
dated February 1, 1990, regarding Property Catastrophe Excess of
Loss Reinsurance Agreement between Transamerica Reinsurance
Company and Condor Insurance Company (Incorporated by reference
to Exhibit 10.15 to Condor Services, Inc.'s 1989 Form' 10-K).
10.8 Memorandum of Reinsurance dated October 23, 1989, as amended by
Addendum Number 1 dated November 22, 1989, Addendum Number 2
dated December 21, 1989 and Addendum Number 3 dated February 1,
1990, regarding Casualty Excess of Loss Reinsurance Agreement
between Transamerica Reinsurance Company and Condor Insurance
Company (Incorporated by reference to Exhibit 10.16 to Condor
Services, Inc.'s 1989 Form 10-K).
10.9 Memorandum of Reinsurance dated October 23, 1989, as amended by
Addendum Number 1 dated December 15, 1989, Addendum Number 2
dated December 21, 1989 and Addendum Number 3 dated February 1,
1990, regarding the Property Quota Share Reinsurance Agreement
between Transamerica Reinsurance Company and Condor Insurance
Company Incorporated by reference to Exhibit 10.17 to Condor
Services, Inc.'s 1989 Form 10-K).
10.10 Memorandum of Reinsurance dated October 23, 1989, as amended by
Addendum Number 1 dated November 22, 1989, Addendum Number 2
dated December 21, 1989, Addendum Number 3 dated January 15,
1990, Addendum Number 4 dated January 15, 1990, and Addendum
Number 5 dated February 1, 1990, regarding the Casualty Quota
Share Reinsurance Agreement between Transamerica Reinsurance
Company and Condor Insurance Company (Incorporated by reference
to Exhibit 10.18 to Condor Services, Inc.'s 1989 Form 10-K).
10.11 Fourth amendment to Lease Agreement dated November 20, 1989, by
and between Amwest Insurance Group, Inc. and
Trillium/Woodland Hills. (Incorporated by reference to 10.15 to
the Company's 1989 Form 10-K.)
10.12 Fifth amendment to Lease Agreement dated December 20, 1989, by
and between Amwest Insurance Group, Inc. and
Trillium/Woodland Hills. (Incorporated by reference to 10.16 to
the Company's 1989 Form 10-K.)
10.13 Sixth amendment to Lease Agreement dated December 31, 1989, by
and between Amwest Insurance Group, Inc. and
Trillium/Woodland Hills. (Incorporated by reference to 10.17 to
the Company's 1989 Form 10-K.)
10.14 Memorandum of Reinsurance dated June 6, 1990 regarding
modification of Excess Open Lot Automatic Agreement between
Condor Insurance Company and General Reinsurance (Incorporated
by reference to Exhibit 10.25 to Condor Services, Inc.'s 1990
Form 10-K).
<PAGE>
10.15 Third-party administrative support service agreement for
California Non-CAIP Assigned Risk Automobile (Incorporated by
reference to Exhibit 10.28 to Condor Services, Inc.'s 1991 Form
10-K).
10.16 Memorandum of Reinsurance dated December 1, 1990 regarding the
Property Quota Share Reinsurance Agreement Between Prudential
Reinsurance Company, The General Security Assurance Corporation
of New York, Insurance Corporation of Hanover and Republic
Western Insurance Company (Incorporated by reference to Exhibit
10.24 to Condor Services, Inc.'s 1990 Form 10-K).
10.17 Reinsurance Treaty dated May 1, 1991 for Semi-automatic Property
Catastrophic cover with General Reinsurance (Incorporated by
reference to Exhibit 10.30 to Condor Services, Inc.'s 1991 Form
10-K).
10.18 Reinsurance Treaty dated May 1, 1991 for Property Quota Share
with Republic Western, Insurance Corporation of Hanover,
Prudential Reinsurance and General Security Assurance
Corporation of New York (Incorporated by reference to Exhibit
10.31 to Condor Services, Inc.'s 1991 Form 10-K).
10.19 Reinsurance Treaty dated May 1, 1991 for Property Catastrophic
Excess of Loss with various underwriting members of Lloyd's
(Incorporated by reference to Exhibit 10.32 to Condor Services,
Inc.'s 1991 Form 10-K).
10.20 Reinsurance Treaty dated May 1, 1991 for Excess of Loss with
Gerling Global Reinsurance Corporation and Republic Western
Insurance Company (Incorporated by reference to Exhibit 10.33 to
Condor Services, Inc.'s 1991 Form 10-K).
10.21 Reinsurance Treaty dated May 1, 1991 for Second Casualty Excess
with Lloyd's and various London company markets (Incorporated by
reference to Exhibit 10.34 to Condor Services, Inc.'s 1991 Form
10-K).
10.22 Reinsurance Treaty dated May 1, 1991 for First Casualty Excess
of Loss domestic placement with Gerling Global Reinsurance
Corporation and Republic Western Insurance Company (Incorporated
by reference to Exhibit 10.35 to Condor Services, Inc.'s 1991
Form 10-K).
10.23 Reinsurance Treaty dated May 1, 1991 for First Casualty Excess
of Loss, foreign placement with Lloyds and various London
company markets (Incorporated by reference to Exhibit 10.36 to
Condor Services, Inc.'s 1991 Form 10-K).
10.24 Contract between the Company and Hewlett-Packard Company, dated
September 16, 1991. (Incorporated by reference to Exhibit 10.22
to the Company's 1991 Form 10-K.)
10.25 Memorandum of Reinsurance dated October 1, 1991 for Facultative
Casualty with Transatlantic Reinsurance and USF Reinsurance
(Incorporated by reference to Exhibit 10.29 to Condor Services,
Inc.'s 1991 Form 10-K).
<PAGE>
10.26 Memorandum of Reinsurance dated March 16, 1992, effective
October 1, 1991; Third Casualty Excess of Loss Reinsurance with
91.67% Transatlantic Reinsurance Company and 8.33% USF Re
Insurance Company (Incorporated by reference to Exhibit 10.39 to
Condor Services, Inc.'s 1992 Form 10-K).
10.27 Lease Agreement dated June 16, 1992 by and between Amwest
Insurance Group, Inc. and Hewlett-Packard Company.
(Incorporated by reference to Exhibit 10.18 to the Company's
1992 Form 10-K.)
10.28 Investment Management Agreement between the Company and AAM
Advisors, Inc., dated August 11, 1992. (Incorporated by
reference to Exhibit 10.21 to the Company's 1992 Form 10-K.)
10.29 Contract between the Company and Scudder, Stevens & Clark, Inc.,
dated August 13, 1992. (Incorporated by reference to Exhibit
10.22 to the Company's 1992 Form 10-K.)
10.30 First Excess of Loss Reinsurance Contract effective October 1,
1992 issued to Amwest Surety Insurance Company and Far West
Insurance Company by a group of reinsurers lead by Kemper
Reinsurance Company. (Incorporated by reference to Exhibit 10.19
to the Company's 1992 Form 10-K.)
10.31 Notice of Commencement Date dated December 9, 1992 regarding
Lease dated December 1, 1991 between Condor Services, Inc. and
Continental Development (Incorporated by reference to Exhibit
10.37 to Condor Services, Inc.'s 1992 Form 10-K).
10.32 Memorandum of Reinsurance dated July 23, 1993 regarding First
Casualty Excess of Loss Reinsurance Agreement between Condor
Insurance Company and Gerling Global Reinsurance Corporation,
U.S. Branch, The Reinsurance Corporation of New York, Republic
Western Insurance Company, and USF Re Insurance Company
(Incorporated by reference to Exhibit 10.40 to Condor Services,
Inc.'s 1993 Form 10-K).
10.33 Memorandum of Reinsurance dated July 23, 1993 regarding Second
Casualty Excess of Loss Reinsurance Agreement between Condor
Insurance Company and Gerling Global Reinsurance Corporation,
U.S. Branch, The Reinsurance Corporation of New York, Republic
Western Insurance Company, Insurance Corporation of Hanover, and
USF Re Insurance Company (Incorporated by reference to Exhibit
10.41 to Condor Services, Inc.'s 1993 Form 10-K).
10.34 Memorandum of Reinsurance dated July 23, 1993 regarding Property
Auto Physical Damage First Funded Catastrophe Excess of Loss
Reinsurance Agreement between Condor Insurance Company and
Gerling Global Reinsurance Corporation, U.S. Branch, AXA
Reinsurance Company, Employers Mutual Casualty Company, and USF
Re Insurance Company (Incorporated by reference to Exhibit 10.42
to the Condor Services, Inc.'s 1993 Form 10-K).
<PAGE>
10.35 Memorandum of Reinsurance dated August 3, 1993 regarding
Addendum No. 2 to the Property Package/Marine 60% Quota Share of
$500,000 Agreement between Condor Insurance Company and Republic
Western Insurance Company (Incorporated by reference to Exhibit
10.43 to Condor Services, Inc.'s 1993 Form 10-K).
10.36 Revolving Credit Agreement dated August 6, 1993 between Amwest
Insurance Group, Inc. and Union Bank.
(Incorporated by reference to Exhibit 10.13 to the Company's
1993 Form 10-K.)
10.37 First Amendment to the First Excess of Loss Reinsurance Contract
effective October 1, 1993. (Incorporated by reference to Exhibit
10.14 to the Company's 1993 Form 10-K.)
10.38 Semiautomatic Bond Quota Share Reinsurance Contract effective
October 1, 1993 issued to Amwest Surety Insurance Company by
Kemper Reinsurance Company and Underwriters Reinsurance Company.
(Incorporated by reference to Exhibit 10.15 to the Company's
1993 Form 10-K.)
10.39 Semiautomatic Contract Surety Reinsurance Agreement effective
March 1, 1994 issued to Amwest Surety Insurance Company and Far
West Insurance Company by a group of reinsurers lead by Kemper
Reinsurance Company. (Incorporated by reference to Exhibit 10.17
to the Company's 1994 Form 10-K.)
10.40 Memorandum of Reinsurance dated June 17, 1994 regarding First
Casualty Excess of Loss Reinsurance Agreement between Condor
Insurance Company and Gerling Global Reinsurance Corporation,
U.S. Branch, The Reinsurance Corporation of New York, Republic
Western Insurance Company and USF Re Insurance Company
(Incorporated by reference to Exhibit 10.48 to Condor Services,
Inc.'s 1994 Form 10-K).
10.41 Memorandum of Reinsurance dated June 17, 1994 regarding Second
Casualty Excess of Loss Reinsurance Agreement between Condor
Insurance Company and Gerling Global Reinsurance, The
Reinsurance Corporation of New York, Republic Western Insurance
Company and USF Re Insurance Company (Incorporated by reference
to Exhibit 10.49 to Condor Services, Inc.'s 1994 Form 10-K).
10.42 First Excess of Loss Reinsurance Contract effective October 1,
1994 issued to Amwest Surety Insurance Company and Far West
Insurance Company by a group of reinsurers lead by Kemper
Reinsurance Company. (Incorporated by reference to Exhibit 10.16
to the Company's 1994 Form 10-K.)
10.43 Memorandum of Reinsurance dated October 21, 1994 regarding
Excess of Loss Reinsurance of Commercial Property Business
Agreement between Condor Insurance Company and General
Reinsurance Corporation (Incorporated by reference to Exhibit
10.50 to Condor Services, Inc.'s 1994 Form 10-K).
10.44 First amendment to the Revolving Credit Agreement (Incorporated
by reference to Exhibit 19.1 to the Company's
March 31, 1995 Form 10-Q.)
<PAGE>
10.45 Memorandum of Reinsurance dated May 1, 1995 regarding First
Excess of Loss Reinsurance Agreement between Condor Insurance
Company and Christiania General Insurance Corporation of New
York, Gerling Global Reinsurance Corporation, U.S. Branch,
Republic Western Insurance Company and USF Re Insurance Company.
(Incorporated by reference to Exhibit 10.54 to Condor Services,
Inc.'s 1995 Form 10-K.)
10.46 Memorandum of Reinsurance dated May 1, 1995 regarding Second
Excess Casualty of Loss Reinsurance between Condor Insurance
Company and Christiania General Insurance Corporation of New
York, Gerling Global Reinsurance Corporation, U.S. Branch,
Republic Western Insurance Company and USF Re Insurance Company.
(Incorporated by reference to Exhibit 10.55 to Condor Services,
Inc.'s 1995 Form 10-K.)
10.47 Memorandum of Reinsurance dated May 1, 1995 regarding Contingent
Excess of Loss Reinsurance between Condor Insurance Company and
Christiania General Insurance Corporation of New York,
Folksamerica Reinsurance Company, Gerling Global Reinsurance
Corporation, U.S. Branch, The Mercantile and General Reinsurance
Company of America, Republic Western Insurance Company, SOREMA
North America Reinsurance Company, TOA-RE Insurance Company of
America, USF RE Insurance Company. (Incorporated by reference to
Exhibit 10.56 to Condor Services, Inc.'s 1995 Form 10-K.)
10.48 Agreement and Plan of Merger dated November 30, 1995 by and
between the Amwest Insurance Group, Inc. and
Condor Services, Inc., a Delaware corporation (Incorporated by
reference to Annex A to the Company's Form S-4
Registration Statement No. 333-00119.)
10.49 Stockholder Agreement dated November 30, 1995 by and between the
Amwest Insurance Group, Inc. and Guy A. Main,
stockholder of Condor Services, Inc. (Incorporated by reference
to Annex B to the Company's Form S-4
Registration Statement No. 333-00119.)
10.50 First Amendment to office lease dated January 10, 1996 between
Condor Services, Inc. and Continental Development Corporation,
amending office lease filed as Exhibit 10.27 hereto
(Incorporated by reference to Exhibit 10.53 to Condor Services,
Inc.'s 1995 Form 10-K.)
10.51 Lease Agreement dated January 24, 1996 by and between Amwest
Insurance Group, Inc. and ACD2, a California
corporation (Incorporated by reference to 10.24 to the Company's
Form S-4 Registration Statement No. 333-00119)
10.52 Option Agreement dated January 24, 1996 by and between Amwest
Insurance Group, Inc. and ACD2, a California
corporation (Incorporated by reference to 10.25 to the Company's
Form S-4 Registration Statement No. 333-00119)
10.53 Casualty Excess of Loss Reinsurance Contract effective July 1,
1996 issued to Condor Insurance Company, Amwest Surety Insurance
Company and Far West Insurance Company by a group of reinsurers
led by Gerling Global Reinsurance Corporation.
<PAGE>
10.54 Contingent Excess of Loss Reinsurance Contract effective July 1,
1996 issued to Co Condor Insurance Company, Amwest Surety
Insurance Company and Far West Insurance Company by a group of
reinsurers led by SOREMA North America Reinsurance Company.
10.55 Restated Revolving Credit Agreement dated July 10, 1996 between
Amwest Insurance Group, Inc. and Union Bank of
California, N.A.
10.56 Excess of Loss Reinsurance Contract effective October 1, 1996
issued to Amwest Surety Insurance Company by a
group of reinsurers lead by Kemper Reinsurance Company.
10.57 Aggregate Excess of Loss Reinsurance Contract effective January
1, 1997 issued to Amwest Surety Insurance Company and Far West
Insurance Company by Underwriters Reinsurance Company (Barbados)
Inc.
Management Contracts and Compensatory Plans: (10.23 through 10.27)
10.58 Stock Option Plan of the Company, as amended. (Incorporated by
reference to Exhibit 4.1 to the Company's Form
S-8 Registration Statement No. 33-82178.)
10.59 Form of Indemnity Agreement between the Company and Individual
Directors and Certain Officers Designated by
the Company's Board of Directors. (Incorporated by reference to
Exhibit 3(10) to the Company's Form 8-B
Registration Statement No. 1-9580.)
10.60 Form of Senior Executive Severance Agreement entered into by the
Company and certain officers. (Incorporated by reference to
10.20 to the Company's 1989 Form 10-K.)
10.61 Rights Agreement dated as of May 10, 1989 executed by the
Company and Bankers Trust Company of California, N.A., as rights
agent. (Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form 8-A dated May 11,
1989.)
10.62 Non-Employee Director Stock Option Plan of the Company.
(Incorporated by reference to Exhibit 4.2 to the
Company's Form S-8 Registration Statement No. 33-82178.)
10.63 Separation Agreement and General and Special Release of Claims
by and between Arthur F. Melton and Amwest Insurance Group, Inc.
Amwest Surety Insurance Company and Far West Insurance Company.
11.1 Statement regarding computation of per share earnings. (See
Note 1 of Notes to Consolidated Financial Statements.)
21.1 List of Subsidiaries of Registrant. (Incorporated by reference
to Exhibit 3(22) to the Company's Form 8-B
Registration Statement No. 1-9580.)
23.1 Consent of KPMG Peat Marwick LLP for incorporation by reference
of their opinion to the Registration
Statements Nos. 33-11020, 33-24243, 33-38128 and 33-82178 on
Form S-8 and in Registration Statements Nos.
33-28645 and 33-37984 on Form S-3 of Amwest Insurance Group,
Inc. (See page 71 of the Consolidated Financial
Statements.)
<PAGE>
(d) Schedules
Independent Auditors' Report.
Index to financial statement schedules.
Schedule Caption
I Summary of Investments-Other Than Investments in Related
Parties at December 31, 1996.
II Condensed Financial Information of the Registrant.
Items omitted are not applicable or not required for Form 10-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMWEST INSURANCE GROUP, INC.
Date: March 28, 1997 By: /s/ JOHN E. SAVAGE
-------------------
John E. Savage
President, Chief Operating Officer,
Co-Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
Chairman of the Board and
Co- Chief Executive Officer
/s/ RICHARD H. SAVAGE (Principal Executive Officer) March 28,1997
- ------------------------
Richard H. Savage
President, Chief Operating Officer,
Co- Chief Executive Officer and Director
/s/ JOHN E. SAVAGE March 28,1997
- ------------------------
John E. Savage
Senior Vice President, Chief Financial
Officer, Treasurer and Director
(Principal Financial and Principal
/s/ STEVEN R. KAY Accounting Officer) March 28,1997
- ------------------------
Steven R. Kay
/s/ ARTHUR F. MELTON Director March 28,1997
- ------------------------
Arthur F. Melton
/s/ THOMAS R. BENNETT Director March 28,1997
- ------------------------
Thomas R. Bennett
/s/ BRUCE A. BUNNER Director March 28,1997
- ------------------------
Bruce A. Bunner
/s/ EDGAR L. FRASER Director March 28,1997
- ------------------------
Edgar L. Fraser
/s/ JONATHAN K. LAYNE Director March 28,1997
- ------------------------
Jonathan K. Layne
/s/ CHARLES L. SCHULTZ Director March 28, 1997
- ------------------------
Charles L. Schultz
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 39
Consolidated Financial Statements:
Consolidated Statements of Operations for the Years
Ended December 31, 1995, 1994 and 1993 40
Consolidated Balance Sheets as of December 31, 1995 and 1994 41
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 43
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1995, 1994 and 1993 45
Notes to Consolidated Financial Statements 46
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Amwest Insurance Group, Inc.:
We have audited the accompanying consolidated balance sheets of Amwest
Insurance Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, cash flows and changes in
stockholders' equity for each of the years in the three year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Amwest
Insurance Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Los Angeles, California
February 21, 1997
KPMG PEAT MARWICK LLP
<PAGE>
<TABLE>
<CAPTION>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
Years ended December 31,
1996 1995 1994
----------------- ---------------- -----------------
<S> <C> <C> <C>
Underwriting Revenues:
Net premiums written $ 89,325 $ 82,814 $ 84,093
Net change in unearned premiums (1,442) 2,356 (2,804)
----------------- ---------------- -----------------
Net premiums earned 87,883 85,170 81,289
----------------- ---------------- -----------------
Underwriting Expenses:
Net losses and loss adjustment expenses 46,647 35,265 28,737
Policy acquisition costs 38,367 38,070 36,607
General operating costs and expenses 12,698 14,309 15,616
Proposition 103 expense - 2,000 -
----------------- ---------------- -----------------
Total underwriting expenses 97,712 89,644 80,960
----------------- ---------------- -----------------
Underwriting income (loss) (9,829) (4,474) 329
Interest expense (999) (1,056) (840)
Collateral interest expense (1,218) (1,698) (1,921)
Merger expense (710) - -
Lease termination cost (1,300) - -
Recovery on misappropriation of funds - 890 -
Net investment income 6,807 7,863 7,337
Net realized gains 2,201 2,176 65
Other revenue 2 797 1,423
----------------- ---------------- -----------------
Income (loss) before income taxes and
extraordinary item (5,046) 4,498 6,393
----------------- ---------------- -----------------
Provision for income taxes (benefit):
Current (1,947) 2,044 975
Deferred (413) (1,215) 377
----------------- ---------------- -----------------
Total provision for income taxes (benefit) (2,360) 829 1,352
----------------- ---------------- -----------------
Net income (loss) $ (2,686) $ 3,669 $ 5,041
================= ================ =================
Earnings Per Common Share:
Net income (loss) $ (.80) $ 1.10 $ 1.50
================= ================ =================
Weighted average number of common
shares outstanding 3,349,458 3,340,851 3,350,118
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
1996 1995
----------------- ----------------
ASSETS
<S> <C> <C>
Investments:
Fixed maturities, available-for-sale (amortized cost of
$101,799 and $114,792 at December 31, 1996 and 1995,
respectively) $ 102,494 $ 117,191
Common equity securities, available-for-sale (cost of $7,217
and $6,630 at December 31, 1996 and 1995, respectively) 9,779 8,689
Preferred equity securities, available-for-sale (cost of $3,971
and $3,485 at December 31, 1996 and 1995, respectively) 4,253 3,592
Other invested assets (cost of $2,667 and $703 at December 31,
1996 and 1995, respectively) 2,849 797
Short-term investments 890 745
----------------- ----------------
Total investments 120,265 131,014
Cash and cash equivalents 6,434 5,232
Accrued investment income 1,399 1,573
Agents' balances and premiums receivable (less allowance
for doubtful accounts of $446 and $436 at
December 31, 1996 and 1995, respectively) 10,882 9,356
Reinsurance recoverable:
Paid loss and loss adjustment expenses 2,749 865
Unpaid loss and loss adjustment expenses 6,443 7,669
Ceded unearned premiums 1,849 2,941
Deferred policy acquisition costs 16,101 13,885
Furniture, equipment and improvements, net 4,747 3,311
Current Federal income taxes receivable 2,802 7
Other assets 7,747 7,980
----------------- ----------------
Total assets $ 181,418 $ 183,833
================= ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands, except share and per share data)
December 31,
1996 1995
----------------- ----------------
LIABILITIES
<S> <C> <C>
Unpaid losses and loss adjustment expenses $ 42,009 $ 31,915
Unearned premiums 33,939 33,589
Funds held as collateral 29,928 37,650
Deferred Federal income taxes 1,842 2,497
Bank indebtedness 12,500 12,500
Amounts due to reinsurers 345 2,188
Other liabilities 10,923 8,419
----------------- ----------------
Total liabilities 131,486 128,758
----------------- ----------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares authorized: issued
and outstanding; none - -
Common stock, $.01 par value, 10,000,000 shares authorized: issued
and outstanding; 3,326,002 at December 31, 1996 and 3,335,607
at December 31, 1995 33 33
Additional paid-in capital 16,827 17,204
Net unrealized appreciation of investments carried at market, net of
income taxes 2,456 3,074
Retained earnings 30,616 34,764
----------------- ----------------
Total stockholders' equity 49,932 55,075
----------------- ----------------
Total liabilities and stockholders' equity $ 181,418 $ 183,833
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Dollars in thousands)
Years ended December 31,
1996 1995 1994
---------------- ----------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,686) $ 3,669 $ 5,041
Adjustments to reconcile net income to cash provided by
operating activities:
Change in agents' balances, premiums receivable and
unearned premiums (1,176) (2,580) 2,841
Change in accrued investment income 174 326 190
Change in unpaid losses and loss adjustment expenses 10,094 (2,738) (11,830)
Change in reinsurance recoverables and ceded
unearned premiums 434 (446) 10,630
Change in amounts due to reinsurers (1,843) 917 429
Change in reinsurance funds held, net - 115 (230)
Change in other assets and other liabilities 2,737 (652) 407
Change in income taxes, net (3,132) (1,160) 681
Change in deferred policy acquisition costs (2,216) 1,630 (1,592)
Net realized (gain) loss on sale of investments (2,295) (2,078) 269
Net realized loss on sale of fixed assets 44 7 1
Equity securities, trading
Purchases - (26,644) (13,895)
Sales - 26,959 13,703
Provision for depreciation and amortization 1,261 1,423 1,889
---------------- ----------------- ----------------
Net cash provided (used) by operating
activities 1,396 (1,252) 8,534
---------------- ----------------- ----------------
Cash flows from investing activities:
Cash received from investments sold, matured, called or repaid:
Investments held-to-maturity - - 1,604
Investments available-for-sale 66,561 106,250 67,033
Cash paid for investments acquired:
Investments held-to-maturity - - (2,027)
Investments available-for-sale (55,197) (93,703) (78,492)
Accretion of premium on bonds 68 (779) 1,028
Capital expenditures, net (2,741) (1,405) (1,540)
---------------- ----------------- ----------------
Net cash provided (used) by investing activities 8,691 10,363 (12,394)
---------------- ----------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 299 448 110
Repurchase of common stock - (375) (467)
Change in funds held as collateral (7,722) (9,276) 2,536
Dividends paid (1,462) (940) (852)
---------------- ----------------- ----------------
Net cash provided (used) by financing activities (8,885) (10,143) 1,327
---------------- ----------------- ----------------
Net increase (decrease) in cash and cash equivalents 1,202 (1,032) (2,533)
Cash and cash equivalents at beginning of year 5,232 6,264 8,797
---------------- ----------------- ----------------
Cash and cash equivalents at end of year $ 6,434 $ 5,232 $ 6,264
================ ================= ================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 2,217 $ 2,754 $ 2,761
Income taxes 848 2,133 1,004
Cash received during the year on:
Investments sold $ 59,093 $ 81,362 $ 63,391
Investments held to maturity 7,468 24,888 5,246
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)
Years ended December 31, 1996, 1995, and 1994
Net
unrealized
appreciation
Common stock (depreciation)
-----------------------
$.01 Additional of Total
Shares issued par paid-in investments Retained stockholders'
value capital carried at earnings equity
market
-------------- -------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 3,349,964 33 17,489 2,981 27,845 48,348
Repurchase of common stock (43,622) (1) (467) - - (468)
Issuance of common stock pursuant to
the exercise of options 12,650 1 110 - - 111
Change in net unrealized depreciation
of investments carried at market - - - (6,023) - (6,023)
Cash dividends - - - - (852) (852)
Net income - - - - 5,041 5,041
-------------- -------- -------------- --------------- -------------- --------------
Balance at December 31, 1994 3,318,992 33 17,132 (3,042) 32,034 46,157
Repurchase of common stock (32,260) - (376) - - (376)
Issuance of common stock pursuant to
the exercise of options 48,875 - 448 - - 448
Change in net unrealized appreciation
of investments carried at market - - - 6,116 - 6,116
Cash dividends - - - - (939) (939)
Net income - - - - 3,669 3,669
-------------- -------- -------------- --------------- -------------- --------------
Balance at December 31, 1995 3,335,607 33 17,204 3,074 34,764 55,075
Retirement of shares pursuant to
completion of merger (48,680) - (676) - - (676)
Issuance of common stock pursuant to
the exercise of options 39,075 - 299 - - 299
Change in net unrealized depreciation
of investments carried at market - - - (618) - (618)
Cash dividends - - - - (1,462) (1,462)
Net loss - - - - (2,686) (2,686)
-------------- -------- -------------- --------------- -------------- --------------
Balance at December 31, 1996 3,326,002 33 16,827 2,456 30,616 49,932
============== ======== ============== =============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Amwest Insurance Group, Inc., (the "Company") through its wholly-owned insurance
subsidiaries, is primarily engaged in underwriting surety bonds nationwide,
commercial automobile insurance in the State of California and, to a lesser
extent, other property and casualty coverages in several western states. The
surety bonds are underwritten through the Company's 30 branch offices, 5 of
which are located in California and the balance of which are located in 20 other
states. In 1996 and 1995, respectively, the Company's business generated in
California was 38.3% and 40.1%.
On March 14, 1996, the Company completed its previously announced merger with
Condor Services, Inc. ("Condor Services"), an insurance holding company. In the
merger, each outstanding share of Condor Services' common stock (other than
shares owned by Condor Services as treasury stock or by the Company) were
converted into the right to receive 0.5 of share of the Company's common stock.
In connection with the merger, the Company issued 992,000 shares of common
stock.
The merger has been accounted for under the pooling of interests method.
Accordingly, all financial information presented herein for all periods includes
Condor Services on a historical cost basis. Additionally, share and per
share data presented in these financial statements reflect the retroactive
effects of the merger with Condor Services.
On March 1, 1996, the Company purchased Southern California Bonding Services,
Inc., a California corporation. The purchase price was immaterial.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Amwest Insurance Group, Inc. and its wholly-owned subsidiaries, Amwest Surety
Insurance Company ("Amwest Surety"), Far West Insurance Company ("Far West"),
Far West Bond Services ("FWBS"), Condor Insurance Company ("Condor"), Raven
Claims Services ("Raven") and Southern California Bonding Services, Inc. The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principals ("GAAP") which differ in some respects
from those followed in reports to insurance regulatory authorities. All material
intercompany transactions and balances have been eliminated.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that effect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Deferred Policy Acquisition Costs
Acquisition costs related to unearned premiums, consisting of commissions,
premium taxes, salaries and other acquisition costs, are deferred and amortized
to income ratably over the estimated term of the bond or the effective period of
the policy. These costs vary with and are related to the production of business.
Deferred acquisition costs are limited to the estimated future profit, based on
the anticipated losses and loss adjustment expenses, maintenance costs and
investment income.
<PAGE>
Policy acquisition costs incurred and amortized to income are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
(Dollars in thousands)
---------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 13,885 $ 15,515 $ 13,923
Costs deferred during the year 40,583 36,440 38,199
Amortization charged to expense (38,367) (38,070) (36,607)
---------------- ----------------- ----------------
Balance at end of year $ 16,101 $ 13,885 $ 15,515
================ ================= ================
</TABLE>
Earnings Per Share
Earnings per share is calculated based on the weighted average number of common
shares outstanding, adjusted for stock options which are considered common stock
equivalents. Weighted average number of common shares outstanding for the years
ended December 31, 1995 and 1994 are based upon Amwest Insurance Group, Inc. and
Condor Services, Inc.'s combined historical weighted average shares, after
adjustment of Condor Services, Inc.'s historical number of shares as converted
and excluding any Condor Services, Inc.'s shares held in treasury or owned by
the Company.
Federal Income Taxes
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying the applicable tax rate to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is recognized
in income in the period that includes the enactment date.
Cash and Cash Equivalents
The cash and cash equivalents shown on the statements of cash flows include cash
and short-term, highly liquid investments (those with original maturities when
purchased of ninety days or less).
Funds Held as Collateral
The Company accepts various forms of collateral for issuance of its surety
bonds, including cash, trust deeds or mortgages on real property, irrevocable
letters of credit, certificates of deposit, savings accounts and publicly traded
securities. The Company's policy is to record in the accompanying consolidated
financial statements only funds received as collateral on which earnings inure
to the benefit of the Company. These funds are not restricted as to withdrawal
or usage, are not segregated by the Company and are invested on an ongoing
basis. At December 31, 1996, the related collateral balances accrue interest
daily at an average rate of 3.8% per annum and are due and payable (together
with accrued interest) to the collateral owner upon exoneration of the
underlying liability.
Investments
Fixed maturities include bonds, notes and redeemable preferred stock. In
connection with establishing its investment objectives, the Company determined
that it needed to maintain flexibility to respond to changes in interest rates,
tax planning considerations or other aspects of asset/liability management.
Since the Company does not purchase fixed maturity investments with a view
towards resale, the fixed maturities have been classified as
"available-for-sale" and are carried at market value. This "available-for-sale"
classification does not denote a trading account.
<PAGE>
Market values for fixed maturities are obtained from a national quotation
service. Temporary unrealized investment gains and losses on fixed maturities,
available-for-sale are credited or charged directly to stockholders' equity, net
of applicable tax affect. When a decline in the value of fixed maturities is
considered to be other than temporary, a loss is recognized in the consolidated
statement of operations.
Equity securities are carried at market value. Net unrealized appreciation
(depreciation) on equity securities "available for sale", to the extent that
there is no other than temporary impairment of value, is credited or charged
directly to stockholders' equity, net of the related deferred Federal income tax
affect. Net unrealized holding gains or losses on trading securities were
included in income in the year of the trade. Transfers of securities between
categories are recorded at market value at the date of transfer. Market values
for equity securities are principally determined by quotations on national
securities exchanges. When a decline in value is considered other than
temporary, a loss is recognized in the consolidated statement of operations.
Realized gains and losses are determined using the specific identification
method.
Short-term investments consist primarily of certificates of deposit with
original maturities of less than one year and greater than 90 days and are
stated at cost which approximates market value.
Losses and Loss Adjustment Expenses
The liability for unpaid losses and loss adjustment expenses is based upon the
accumulation of individual case estimates for losses reported prior to the close
of the accounting period plus estimates of unreported claims. The liability is
stated net of anticipated salvage and subrogation recoverable and other
non-reinsurance recoveries.
In evaluating reserves for surety losses and loss adjustment expenses, the
Company considers a number of factors including an estimate of the costs to
complete the project, outstanding obligations to subcontractors, supplies and
the like and prevailing case law and regulations pertaining to the underlying
exposures. The Company also considers the financial strength of the principal,
possible offsets to the claimed amount and defenses available to the principal
and the Company. The Company may use outside attorneys and construction
consultants throughout the reserving process. All reserves for reported claims
are net of anticipated collateral and other non-reinsurance recoveries. Reserves
for incurred but not reported claims are based on Company experience. An amount
is included in the reserves for unallocated loss adjustment expenses consisting
of the costs for the Company's claims, legal and subrogation departments to
settle claims incurred prior to year end.
The loss settlement period on most of the Company's insurance claims is
relatively short. Nevertheless, it is often necessary to adjust estimates of
liability on a claim either upward or downward between the time a claim is
reported and the time of payment. There are inherent uncertainties in estimating
reserves, therefore, actual losses and loss adjusting expenses may deviate,
perhaps substantially, from reserves on the accompanying consolidated financial
statements, which could have a material adverse effect on the Company's
financial condition and results of operations. The Company does not discount its
claim reserves for financial reporting purposes. While the Company may make
implicit provisions for inflation or increasing costs in establishing reserves
for known claims, the relatively short claim to payment period and the nature of
the insured losses makes provisions for inflation or increasing costs generally
unnecessary. Any differences between estimates and ultimate payments are
reflected in the Consolidated Statements of Operations in the period in which
such estimates are changed and could have a material adverse effect on the
Company's financial condition and results of operations at that time.
<PAGE>
Premium Income Recognition
Premium income on surety bonds are recognized as follows: bonds with a known
term (such as contractor's license, sales tax and most miscellaneous bonds), are
recognized as income ratably over the term of the bond. Bonds on which the
Company has significant experience in and information available for estimating
the term (such as most court bonds and customs bonds), are recognized as income
over the estimated term of the bond. For other bonds with indefinite terms
(generally contract performance bonds), the Company estimates a term of twelve
months, and premiums are recognized ratably over such period, unless information
comes to the Company's attention that the obligation guaranteed has already been
discharged, in which case all remaining unearned premiums are immediately
recognized as earned.
Premium income on non-surety property and casualty policies are recognized
ratably over the effective period of the policy.
Reinsurance
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Amounts recoverable from reinsurers
are estimated in a manner consistent with the premium and claim liability
associated with the reinsured bond or policy.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", and Statement of Financial Accounting Standards
No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of
Financial Instruments", require disclosure of estimated fair value information
about financial instruments, for which it is practicable to estimate that value.
Under Statement of Financial Accounting Standards No. 115, the Company
categorizes all of its investments in debt and equity securities as available
for sale. Accordingly, all investments, including cash and short term
investment, are carried on the balance sheet at their fair value. The carrying
amounts and fair values for investment securities are disclosed in Note 3 and
were drawn from standard trade data sources such as market and broker quotes.
The estimated fair value of bank indebtedness equals its carrying value, which
was based on the bank loan's variable interest rate which approximates the rates
currently available today. The carry amounts and fair values for the bank
indebtedness are disclosed in Note 10.
Risk-Based Capital
In December 1993, the NAIC adopted a risk-based capital formula for property
casualty insurance companies which establishes recommended minimum capital
requirements. The formula has been designed to capture the widely varying
elements of risks undertaken by writers of different lines of insurance having
differing risk characteristics, as well as writers of similar lines where
differences in risk may be related to corporate structure, investment policies,
reinsurance arrangements and a number of other factors. The Company has
calculated its risk-based capital requirement as of December 31, 1996 and found
that its subsidiaries exceeded the highest level of recommended capital
requirement.
Stock-Based Compensation
During October, 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). The disclosure provisions are effective for fiscal
years beginning after December 15, 1995. The Company has continued to use the
accounting methods presented by Accounting Principles Board Opinion No. 25 and
has expanded its disclosure of stock-based compensation as permitted by FAS 123
(see Note 17). Accordingly, adoption of this pronouncement did not have a
material effect on the consolidated financial statements of the Company.
<PAGE>
Reclassifications
Certain amounts in the accompanying consolidated financial statements for 1994
and 1995 have been reclassified to conform with the 1996 financial statement
presentation.
(2) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL
INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
The vast majority of the collateral held by the Company does not qualify for
inclusion in the accompanying consolidated financial statements. The Company's
policy is to record in the accompanying consolidated financial statements only
those funds received as collateral on which earnings inure to the benefit of the
Company. Most of the off-balance sheet collateral is in the form of irrevocable
letters of credit and certificates of deposit.
On a case-by-case basis, loss reserves are reduced for that portion that can be
recovered through liquidation of collateral. To the extent that these collateral
items prove to be worth less than the face or notional value, the Company may
incur additional losses. However, the Company believes that since the quality of
collateral funds are evaluated prior to the setting of loss reserves on a
case-by-case basis, any differences between face or notional value and ultimate
disposition value will generally be minor.
A summary of off-balance sheet collateral held by the Company as of December 31
is as follows:
December 31,
1996 1995
(Dollars in thousands)
----------------------------------
Off-Balance Sheet Collateral:
Irrevocable letters of credit $ 140,004 $ 138,463
Certificates of Deposit 27,624 35,249
Other Collateral 47,687 54,716
---------------- -----------------
Total Off-Balance Sheet Collateral $ 215,315 $ 228,428
================ =================
Trust deeds and mortgages on real property held as collateral are not reflected
in the above figures due to the inexact nature of their disposition values.
During 1996 and 1995, the Company received approximately 9%, of its total
collateral recoveries from trust deeds and mortgages on real property.
The Company's off-balance-sheet collateral, most notably irrevocable letters of
credit, is taken on behalf of principals located in every geographical region of
the country. The Company does not believe there to be noteworthy concentration
of credit risk in any single area.
<PAGE>
(3) INVESTMENTS
A summary of net investment income is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
(Dollars in thousands)
---------------------------------------------------
<S> <C> <C> <C>
Gross investment income:
Fixed maturities $ 6,405 $ 7,357 $ 7,191
Equity securities 409 498 214
Cash and short-term investments 338 509 401
Investment expense (345) (501) (469)
---------------- ----------------- ----------------
Net investment income $ 6,807 $ 7,863 $7,337
================ ================= ================
Gross realized gains:
Fixed maturities $ 1,343 $ 1,780 $ 533
Equity securities 1,528 1,710 697
Other assets 53 - -
Gross realized losses:
Fixed maturities (218) (519) (649)
Equity securities (358) (645) (465)
Other assets (147) (150) (51)
---------------- ----------------- ----------------
Net realized gains $ 2,201 $ 2,176 $ 65
================ ================= ================
</TABLE>
A summary of the accumulated net unrealized appreciation (depreciation) on
investments carried at market and the applicable deferred Federal income taxes
is shown below:
December 31,
1996 1995
(Dollars in thousands)
-----------------------------------
Gross unrealized appreciation:
Fixed maturities $ 1,648 $ 2,944
Equity securities 3,190 2,524
Other invested assets 182 94
Gross unrealized (depreciation):
Fixed maturities (953) (545)
Equity securities (346) (358)
----------------- -----------------
Gross unrealized appreciation on
investments carried at market 3,721 4,659
Deferred Federal income taxes (1,265) (1,585)
----------------- -----------------
Net unrealized appreciation
(depreciation), net of deferred
Federal income taxes $ 2,456 $ 3,074
================= =================
<PAGE>
(3) INVESTMENTS (CONTINUED)
A summary of the net increase (decrease) in unrealized investment gains (losses)
less applicable deferred Federal income taxes is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
(Dollars in thousands)
---------------------------------------------------
<S> <C> <C> <C>
Fixed maturities, available-for-sale $ (1,704) $ 7,230 $ (7,750)
Common equity securities, available-for-sale 503 1,613 (866)
Preferred equity securities, available-for-sale 175 330 (509)
Other invested assets 88 94 -
---------------- ----------------- ----------------
Total (938) 9,267 (9,125)
Deferred Federal income taxes 320 (3,151) 3,102
---------------- ----------------- ----------------
Net increase (decrease) in unrealized investment
gains (losses), net of deferred Federal income
taxes $ (618) $ 6,116 $ (6,023)
================ ================= ================
</TABLE>
The Company's insurance subsidiaries are required to deposit securities in
several of the states in which it conducts business as a condition of licensure.
These investments are included in the "Fixed maturities" and "Short-term
investments" captions within the accompanying consolidated balance sheets. As of
December 31, 1996 and 1995, the market value of these deposits was approximately
$12,561,000 and $11,562,000, respectively.
The amortized cost and estimated market values of investments in fixed
maturities are as follows:
<TABLE>
<CAPTION>
December 31, 1996
(Dollars in thousands)
---------------------------------------------------------------------
----------------- ---------------- ----------------- ----------------
Gross Gross
Amortized Cost Unrealized Unrealized Estimated
Fixed maturities, available-for-sale Gains Losses Market Value
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Bonds:
U.S. Government $ 13,582 $ 287 $ (130) $ 13,739
Asset backed securities 3,997 20 (13) 4,004
Mortgage backed securities 24,352 89 (196) 24,245
States, municipalities and political
subdivisions 26,034 602 (28) 26,608
Industrial and miscellaneous 27,658 517 (502) 27,673
----------------- ---------------- ----------------- ----------------
Total 95,623 1,515 (869) 96,269
Redeemable preferred stock 6,001 133 (84) 6,050
Certificates of Deposit 175 - - 175
----------------- ---------------- ----------------- ----------------
Total $ 101,799 $ 1,648 $ (953) $ 102,494
================= ================ ================= ================
</TABLE>
<PAGE>
(3) INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1995
(Dollars in thousands)
---------------------------------------------------------------------
----------------- ---------------- ----------------- ----------------
Gross Gross
Amortized Cost Unrealized Unrealized Estimated
Fixed maturities, available-for-sale Gains Losses Market Value
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Bonds:
U.S. Government $ 31,376 $ 740 $ (15) $ 32,101
Asset backed securities 5,542 94 - 5,636
Mortgage backed securities 17,547 307 (131) 17,723
States, municipalities and political
subdivisions 34,202 756 (6) 34,952
Industrial and miscellaneous 19,653 921 (315) 20,259
----------------- ---------------- ----------------- ----------------
Total 108,320 2,818 (467) 110,671
Redeemable preferred stock 6,447 126 (78) 6,495
Certificates of Deposit 25 - - 25
----------------- ---------------- ----------------- ----------------
Total $ 114,792 $ 2,944 $ (545) $ 117,191
================= ================ ================= ================
</TABLE>
The amortized cost and estimated market value of fixed maturities at December
31, 1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties. Prepayment
assumptions for asset backed and mortgage backed securities are obtained from
broker dealer survey values or internal estimates. These assumptions are
consistent with the current interest rate and economic environment.
Maturity distribution of fixed maturities, Amortized Cost Estimated
available-for-sale: Market Value
(dollars in thousands)
-----------------------------------
Due in 1 year or less $ 4,235 $ 4,217
Due after 1 year through 5 years 47,667 48,023
Due after 5 years through 10 years 28,440 28,561
Due after 10 years through 20 years 13,905 14,010
Due after 20 years 7,552 7,683
----------------- -----------------
Total bonds and sinking fund preferred stock $ 101,799 $ 102,494
================= =================
Proceeds from the sale of available-for-sale securities during 1996 and 1995
were $59,093,000 and $81,362,000, respectively. Gross gains of $2,871,000 and
$2,990,000 and gross losses of $576,000 and $779,000 were realized on those
sales in 1996 and 1995, respectively. Gross gains of $500,000 and gross losses
of $385,000 were realized on the sale of trading securities during 1995.
Securities with an amortized cost of $11,285,000 were transferred from
held-to-maturity to available-for-sale during 1995. An unrealized gain of
$532,000 related to these securities is included in the net unrealized
appreciation (depreciation) of investments carried at market component of
stockholders' equity. This transfer was made at December 31, 1995 because the
Company concluded that it would no longer commit to holding any security to
maturity, as this limited management from responding to changes in circumstances
and perceived economic trends.
<PAGE>
(4) FURNITURE, EQUIPMENT AND IMPROVEMENTS
Furniture, equipment and improvements are recorded at historical cost.
Depreciation and amortization of automobiles, furniture and equipment is
calculated using the straight-line method over estimated useful lives from 3 to
5 years. Amortization of leasehold improvements is calculated using the
straight-line method over the estimated useful lives of the assets or the term
of the lease, whichever is shorter.
December 31,
1996 1995
Summary of Furniture, Equipment (Dollars in thousands)
and Improvements: -----------------------------------
Automobiles $ 145 $ 60
Furniture 2,664 2,482
Equipment 8,965 7,092
Improvements 3,019 2,774
----------------- -----------------
Total fixed assets 14,793 12,408
Less accumulated depreciation (10,046) (9,097)
----------------- -----------------
Furniture, equipment and
improvements, net $ 4,747 $ 3,311
================= =================
(5) INCOME TAXES
Amwest Insurance Group, Inc. and subsidiaries file a consolidated income tax
return. A reconciliation of the corporate federal tax with the financial
statement effective tax for the years ended December 31, 1996, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
(Dollars in thousands)
---------------------------------------------------
<S> <C> <C> <C>
Computed tax expense at statutory rate $ (1,715) $ 1,529 $
2,173
Tax-advantaged interest income (616) (556) (737)
Change in valuation allowance - (94) (168)
State taxes 47 97 99
Other, net (76) (147) (15)
---------------- ----------------- ----------------
Total provision for income taxes (benefit) $ (2,360) $ 829 $ 1,352
================ ================= ================
</TABLE>
<PAGE>
(5) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax liability and the deferred tax asset at December 31, 1996
and 1995 are presented below.
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995
(Dollars in thousands)
-----------------------------------
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs $ (5,474) $ (4,721)
Unrealized investment gains (1,314) (1,603)
Unearned contingent commission (215) (332)
Fixed assets (40) (11)
Bad debt reserve - (30)
Discount on salvage & subrogation reserves (62) (113)
Deductible receivables (50) (82)
Other (39) (12)
----------------- -----------------
Total gross deferred tax liabilities (7,194) (6,904)
----------------- -----------------
Deferred tax assets:
Unearned premiums 2,182 2,084
Accrued loss on lease termination and sub-lease 421 -
Discount on loss reserves 1,289 1,060
Proposition 103 reserve - 680
Accrued vacation 196 204
Deferred compensation/ Accrued severance 216 115
Alternative minimum tax credit 667 586
Bad debt reserve 328 -
Net operating loss 622 159
Other 82 170
----------------- -----------------
Total gross deferred tax assets 6,003 5,058
Less: valuation allowance (651) (651)
----------------- -----------------
Net deferred tax assets 5,352 4,407
----------------- -----------------
Total net deferred tax liability $ (1,842) $ (2,497)
================= =================
</TABLE>
Financial Accounting Standard No. 109 requires the establishment of a valuation
allowance when management has determined that it is more likely than not that a
portion of the deferred tax asset will not be realized. The ultimate realization
of deferred tax assets is dependent upon the reversal of deferred credits and
the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers primarily the
scheduled reversal of deferred tax liabilities and tax planning strategies in
making this assessment. A valuation allowance has been established based on this
criteria.
At December 31, 1996, the Company has $1,809,000 of net operating loss
carryforwards ("NOLs") which will expire, if unused, in the year 2011. A portion
of this NOL was attributable to Condor Services prior to the merger with the
Company and is limited to the taxable earnings of the Company's subsidiary,
Condor.
<PAGE>
(6) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table sets forth a reconciliation of the liability for losses and
loss adjustment expenses for the periods shown:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
(Dollars in thousands)
------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 31,915 $ 34,653 $ 46,483
Less: net reinsurance recoverable on unpaid loss and loss
adjustment expenses (7,669) (8,069) (17,981)
------------- -------------- -------------
Net balance at beginning of year 24,246 26,584 28,502
Provision for losses and loss adjustment expenses occurring in
current year 45,853 35,508 30,400
(Decrease) increase in estimated losses and loss adjustment expenses
for claims occurring in prior years 794 (243) (1,663)
Losses and loss adjustment expense payments for claims occurring during:
Current year (21,638) (19,283) (14,795)
Prior years (13,379) (18,320) (15,860)
------------- -------------- -------------
Net balance at end of year 35,876 24,246 26,584
Plus: net reinsurance recoverable on unpaid loss and loss
adjustment expenses 6,133 7,669 8,069
------------- -------------- -------------
Balance at end of year $ 42,009 $ 31,915 $ 34,653
============= ============== =============
</TABLE>
The increase or decrease in estimated losses and loss adjustment expenses for
losses occurring in prior years reflects the net effect of the resolution of
losses for other than full reserve value and subsequent readjustment of loss
values as of December 31st of the applicable years.
(7) REINSURANCE
The Company cedes insurance to reinsurers and the Small Business Administration
("SBA") under reinsurance treaties that cover individual risks or entire classes
of business. Although the ceding of insurance does not discharge the Company
from its primary liability to its bondholder, the insurance company that assumes
the coverage assumes the related liability, and it is the practice of insurers
for accounting purposes to treat reinsured risks, to the extent of the
reinsurance ceded, as though they were risks for which the original insurer is
not liable.
The Company evaluates and monitors the financial condition of its reinsurers in
order to minimize its exposure to significant losses from reinsurer
insolvencies. The reinsurance recoverables and ceded unearned premium reported
on the accompanying balance sheet would represent a liability of the Company if
all reinsurers were unable to meet existing obligations under reinsurance
agreements.
<PAGE>
(7) REINSURANCE (CONTINUED)
The following amounts represent premiums assumed and the deductions for
reinsurance ceded for the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
(Dollars in thousands)
---------------------------------------------------
<S> <C> <C> <C>
Net premiums written:
Premiums written $ 94,935 $ 93,604 $ 94,018
Premiums assumed 2,307 580 204
Premiums ceded (7,917) (11,370) (10,129)
---------------- ----------------- ----------------
Net premiums written $ 89,325 $ 82,814 $ 84,093
================ ================= ================
Net change in unearned premiums:
Direct $ (330) $ 1,080 $ (2,731)
Ceded (1,112) 1,276 (73)
---------------- ----------------- ----------------
Net change in unearned premiums $ (1,442) $ 2,356 $ (2,804)
================ ================= ================
Net loss and loss adjustment expenses:
Losses and loss adjustment expenses $ 50,836 $ 42,197 $ 36,345
Reinsurance recoveries (4,189) (6,932) (7,608)
---------------- ----------------- ----------------
Net losses and loss adjustment expenses $ 46,647 $ 35,265 $ 28,737
================ ================= ================
</TABLE>
On the surety lines of business, the Company's subsidiaries maintain an excess
of loss reinsurance treaty with a group of reinsurers lead by Kemper Reinsurance
Company, (the "Kemper Treaty"). Kemper Reinsurance Company is a 50% participant,
Scor Reinsurance Company has a 40% participation and Gerling Global Reinsurance
Corp., USB has a 10% participation in the treaty.
The Kemper Treaty, which was amended on October 1, 1996, may be canceled at the
election of either party by providing notice of cancellation 90 days prior to
any anniversary, however, the reinsurers would remain liable for covered losses
incurred up to the cancellation date. The amended Kemper Treaty limits the
Company's exposure on any one principal (the person or entity for whose account
the surety contract is made, and whose debt or obligation is the subject of the
surety contract) to the first $2,000,000 of loss and to losses in excess of
$6,000,000. Coverage is provided for most types of bonds which the Company
writes except SBA guaranteed bonds, which are not covered by the treaty. The
reinsurers' maximum exposure under the Kemper Treaty is $8,000,000 of losses
discovered during any one contract period (October 1 to October 1). Prior to the
amendment on October 1, 1996, the coverage was $5,500,000 excess $500,000 and
the Company received a percentage of the profit, if any, on the treaty in the
form of contingent commission. Contingent commissions in the amount of
$3,287,000, $2,226,000 and $366,000 were recognized under the profit sharing
provisions of the treaty for the years ended December 31, 1996, 1995 and 1994,
respectively.
In conjunction with the change in reinsured limits effective October 1, 1996 the
Company, effective January 1, 1997, entered into an aggregate stop-loss treaty
with Underwriters Reinsurance Company (Barbados), Inc. This contract covers
approximately $5,000,000 of losses and allocated loss adjustment expenses on the
surety lines of business in excess of 25.86% of net earned premiums, with an
option to increase the coverage by up to $5,000,000 by payment of $1,000,000
prior to the incurrance of $2,500,000 in ceded losses under the original treaty.
<PAGE>
(7) REINSURANCE (CONTINUED)
The Company also maintains a semiautomatic bond facultative reinsurance contract
for surety bonds. The contract also applies to most types of bonds the Company
writes with single bond penalty limits up to $10,000,000 or multiple bonds under
a specific aggregate work program per principal with limits up to $20,000,000
for contract surety bonds and $25,000,000 for commercial surety bonds. The
Company's retention under the contract is $6,000,000 plus 12% of the reinsured
amount. The Company's aggregate retention is additionally reinsured by the
aforementioned excess of loss reinsurance treaty, further limiting the Company's
net exposure.
The Company's insurance subsidiaries also issue contract bonds under the SBA
Surety Guarantee Program. Industry practice is to account for SBA guarantees as
reinsurance transactions. The purpose of the SBA Surety Guarantee Program is to
assist small contractors, who have not established credit or who fail to meet a
surety's normal underwriting standards, in obtaining bonds. An SBA guarantee
covers between 80% and 90% of the surety's liability up to $1,250,000 per bond.
For its liability lines of business, the Company has reduced its exposure on any
one risk with the purchase of excess of loss reinsurance. The net retained
amount has varied by year, primarily based on the Company's surplus position.
Currently, the Company retains the first $400,000 on any one risk with the next
$600,000 ceded to a consortium of reinsurers led by Gerling Global Reinsurance
Corporation. The Company participates in this treaty with a 10% share. The
Company further reinsures $1,000,000 in excess of $1,000,000 for its liability
coverages including extra contractual obligations and excess of policy limits
exposures.
For its property coverages, the Company generally retains the first $200,000 on
any one exposure and purchases excess of loss reinsurance for $4,800,000 in
excess of $200,000. Limits relating to its Hawaiian homeowners program differ
from the above with the Company retaining $500,000 ultimate on each net loss
with the Company reinsuring $1,250,000 in excess of $500,000. The Company
participates in the Hawaii Hurricane Relief Fund, and accordingly, its Hawaiian
policies exclude wind coverage over 75 miles per hour.
(8) RESTRICTIONS ON DIVIDENDS
As a holding company, the Company depends primarily on dividends from its
insurance subsidiaries for its cash flow requirements. The Company's insurance
subsidiaries are subject to state regulations which restrict their ability to
pay dividends. These regulations restrict the amount of stockholder dividends
which may be paid within any one year without the approval of the Department of
Insurance in their state of domicile. In 1994 and 1995 Amwest Surety and Far
West were domiciled in California. The California Insurance Code provides that
amounts may be paid as dividends on an annual noncumulative basis without prior
approval up to a maximum of the greater of (1) statutory net income for the
preceding year or (2) 10% of statutory policyholders' surplus as of the
preceding December 31. In 1995, Amwest Surety and Far West redomesticated to the
state of Nebraska. The Nebraska Insurance Code provides that amounts may be paid
as dividends on an annual basis without prior approval up to a maximum of the
greater of (1) statutory net income, excluding realized capital gains, for the
preceding year plus any carryforward net income from the previous two calendar
years that have not already been paid out as dividends or (2) 10% of statutory
policyholders' surplus as of the preceding December 31. Amwest Surety and Condor
can pay $3,108,000 and $922,000, respectively, in dividends to the Company
during 1997 without prior approval. For the years ended December 31, 1996, 1995
and 1994, Amwest Surety paid dividends of $500,000, $2,000,000 and $1,000,000,
respectively, to Amwest Insurance Group, Inc.
The Company's credit agreements also contain restrictions on the payment of
dividends (see Note 10).
<PAGE>
(9) STATUTORY ACCOUNTING PRINCIPLES FINANCIAL INFORMATION
The Company's insurance subsidiaries are required to file annual statements
with insurance regulatory authorities prepared on an accounting basis prescribed
or permitted by such authorities ("statutory"). For such subsidiaries, generally
accepted accounting principles differ in certain respects from statutory
accounting practices. The more significant of these differences for statutory
accounting are (a) premium income is taken into earnings over the periods
covered by the policies, whereas the related acquisition and commission costs
are expensed when incurred; (b) all bonds and sinking fund preferred stock are
recorded at amortized cost, regardless of trading activity; (c) non-admitted
assets are charged directly against surplus; (d)loss reserves and unearned
premium reserves are stated net of reinsurance; (e) Federal income taxes are
recorded when payable; and (f) the outstanding contribution certificate is
included as a component of surplus, and the interest on the outstanding
contribution certificate is a direct charge to surplus. Additionally, the cash
flow presentation is not consistent with generally accepted accounting
principles and a reconciliation from net income to funds provided by operations
is not presented.
Policyholders surplus and net income on a statutory basis is as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
Statutory Statutory Statutory Statutory
Policyholders Net Income Statutory Net Income Statutory Net Income
Surplus (Loss) Surplus (Loss) Surplus (Loss)
(Dollars in thousands)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Amwest Surety 31,081 (3,803) 36,813 5,204 34,004 3,061
Far West 7,042 1,176 5,866 555 5,311 266
Condor 9,217 (1,707) 8,548 48 6,463 297
</TABLE>
(10) BANK INDEBTEDNESS
On August 6, 1993, the Company entered into a revolving credit agreement with
Union Bank for $12,500,000. The debt agreement was amended on April 24, 1995 and
again on July 10, 1996 to increase the amount available under the revolving line
of credit from $12,500,000 to $15,000,000. The amounts available are reduced by
$3,000,000 each year beginning on September 30, 1997 and ending on September 30,
2001. Accordingly at December 31, 1996, $15,000,000 is available under the
revolving line of credit, $12,500,000 of which is currently utilized. The bank
loan has a variable rate based upon fluctuations in the London Interbank Offered
Rate (LIBOR) and amortizing principal payments. The interest rate at December
31, 1996 was 6.88%. The credit agreement contains certain financial covenants
with respect to capital expenditures, business acquisitions, liquidity ratio,
leverage ratio, tangible net worth, net profit and dividend payments.
Balance
(Dollars in thousands)
-------------------------
Summary of debt maturity schedule:
September 30, 1997 $ 3,000
September 30, 1998 3,000
September 30, 1999 3,000
September 30, 2000 3,000
September 30, 2001 3,000
<PAGE>
(10) BANK INDEBTEDNESS (CONTINUED)
At December 31, 1996, the Company was in violation with respect to a covenant
requiring a net profit for the fiscal year and a covenant requiring a certain
level of statutory policyholders' surplus. The Company has received a letter
from Union Bank stating that they intend to issue a waiver regarding compliance
with these two covenants.
The bank loan has a variable interest rate which approximates the rates
currently available today. Accordingly, estimated fair value of the debt is
equal to the statement value of $12,500,000.
(11) OTHER LIABILITIES
The following table is a summary of other liabilities at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
December 31,
1996 1995
(Dollars in thousands)
-----------------------------------
<S> <C> <C>
Accrued salaries, fringe benefits and other compensation $ 2,271 $ 2,067
Premium taxes payable 878 314
Accrued rent payable 654 932
General accounts payable 141 27
Accrued payable - SBA 36 102
Dividends payable 365 237
Loss on early lease termination and sub-lease 1,696 459
Proposition 103 reserve 1,928 2,000
Litigation reserve 175 180
Other 2,779 2,101
----------------- -----------------
Total other liabilities $ 10,923 $ 8,419
================= =================
</TABLE>
(12) COMMITMENTS AND CONTINGENCIES
The Company is subject to certain claims arising in the ordinary course of its
operations. The Company believes that the ultimate resolution of such matters
will not materially affect its consolidated financial condition.
At December 31, 1996, the Company occupied office space under various operating
leases in addition to a leased mini-computer that have remaining noncancellable
lease terms in excess of one year. Rental expenses of approximately $5,647,000,
$4,033,000 and $3,972,000 for the years ended December 31, 1996, 1995 and 1994,
respectively, have been charged to operations in the accompanying consolidated
statements of operations.
<PAGE>
(12) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Balance
(Dollars in thousands)
--------------------------
Summary of minimum future annual
rental commitments:
1997 $ 3,174
1998 1,831
1999 1,582
2000 1,380
2001 and thereafter 12,108
--------------------------
Total minimum payments 20,075
Sublease income (191)
--------------------------
Total $ 19,884
==========================
(13) PROPOSITION 103
On November 8, 1988, California voters passed Proposition 103, an insurance
initiative which required a rollback in insurance rates for policies (and bonds)
written or renewed during the twelve month period beginning November 8, 1988 and
provided that changes in insurance premiums after November 8, 1988 must be
submitted for approval of the California Insurance Commissioner prior to
implementation. While the Proposition has the most significant impact on
automobile insurance, its provisions, as written, also apply to other property
and casualty insurers including surety insurers.
On August 26, 1990, the State of California enacted Insurance Code Section
1861.135 ("Section 1861.135") exempting surety insurance from the rate rollback
and prior approval provisions of Proposition 103. Section 1861.135 does not
effect Proposition 103's prohibition against excessive, inadequate or
discriminatory rates. Due to the enactment of Section 1861.135, the Company
terminated a previously established reserve for potential premium rebates.
Subsequently, the Department of Insurance ("Department") and Voter Revolt
brought a motion for writ of mandate challenging the validity of Section
1861.135. On March 21, 1991, the Los Angeles Superior Court concluded that
Section 1861.135 did not violate the California Constitution or provisions of
Proposition 103. The Department and Voter Revolt appealed. On December 7, 1993,
the Second District Court of Appeal overturned Section 1861.135 by a 2-1 vote.
On February 24, 1994, the California Supreme Court agreed to hear the Company's
petition for review, thereby staying the Court of Appeals opinion. On December
14, 1995, the Supreme Court of the State of California affirmed the decision of
the Second District Court of Appeal, overturning Insurance Code Section
1861.135, which exempted the surety insurance industry from major provisions of
Proposition 103. Accordingly, the Company is no longer exempted from the rate
rollback and prior approval provisions contained in Proposition 103. The Company
accrued $2,000,000 during the quarter ended December 31, 1995 representing the
Company's best estimate of its rollback obligations pursuant to Proposition 103.
On August 15, 1996, the Company entered into a Stipulation and Consent Order
with the Insurance Commissioner of the State of California which requires the
Company's insurance subsidiaries to pay $1,928,370. The Proposition 103 refund
checks were issued in January 1997.
<PAGE>
(14) RELATED PARTY TRANSACTIONS
Condor, since the commencement of insurance company operations in 1989, has
offered its monthly commercial automobile insurance policies to members of the
Waste Industry Loss Prevention and Safety Association (d.b.a. "The Safety
Association"). One of the directors and executive officers of the Company is an
officer, director and shareholder of The Safety Association. In order to accept
monthly commercial automobile coverage written by Condor, an applicant must
become a member of The Safety Association. This business constituted
approximately 88%, 90% and 94% for 1996, 1995 and 1994, respectively, of total
premiums written by Condor. Since 1981, the Company has had the exclusive right
to provide insurance programs to The Safety Association pursuant to an agreement
which may be terminated as of April 1 of any year by either party by giving 15
months notice of cancellation.
(15) STOCKHOLDER RIGHTS PLAN
On May 10, 1989, the Board of Directors adopted a Stockholder Rights Plan and
declared a dividend of one Stock Purchase Right (a "Right") for each share of
common stock outstanding on May 22, 1989. Each Right becomes exercisable on the
tenth business day after a person or group (other than the Company and certain
related parties) has acquired or commenced a tender or exchange offer to acquire
20% or more of the Company's common stock, or upon consummation of certain
mergers, business combinations or sales of the Company's assets. If the Rights
become exercisable, a holder will be entitled to purchase in certain cases (i)
one one-hundredth of a share of Series A Junior Participating Preferred Stock,
$.01 par value, at the then current exercise price (initially $50), (ii) shares
of common stock, $.01 par value, having a market price equal to two times the
then current exercise price, or (iii) in case of a merger, common stock of the
acquiring corporation having a market value equal to two times the then current
exercise price.
The Company is entitled to redeem the Rights at $.01 per Right under certain
circumstances. The rights do not have voting or dividend rights, and cannot be
traded independently from the Company's common stock until such time as they
become exercisable.
(16) RETIREMENT PLAN
In January, 1992, the Company adopted a 401(k) savings plan entitled the Amwest
Surety Insurance Company 401(k) Plan (the "Plan"). Employees eligible for
participation in the Plan must have attained one year of service and be at least
21 years of age. The Plan provides for employer matching contributions at 50%,
up to a maximum of the first 6% of the employee contribution and become fully
vested at the end of 5 years of employment. Total expense to the Company during
1996, 1995 and 1994 amounted to $344,000, $275,000 and $263,000, respectively.
<PAGE>
(17) STOCK OPTIONS
The Company has a Stock Option Plan and a Non-Employee Director Stock Option
Plan ("the Plans") pursuant to which it has reserved an aggregate of 751,000
shares of its Common Stock, subject to adjustment for reorganizations,
recapitalizations, stock splits or similar events. Shares of Common Stock
subject to the unexercised portions of any options granted under the Plans which
expire, terminate or are canceled may again be subject to options under the
Plans. The per share exercise price of options under the Plans may not be less
than 100% of the fair market value of the underlying Common Stock on the date of
the grant of the option (110% of such fair market value with respect to
Incentive Options granted to an individual who owns more than 10% of the total
combined voting power of all classes of stock of the Company or any subsidiary
or parent corporation). The Plans were approved by the Company's stockholders.
<TABLE>
<CAPTION>
Non-Employee
Director
Stock Option Plan Stock Option Plan Total
------------------------- ------------------------- --------------------------
<S> <C> <C> <C>
Shares reserved for issuance 676,000 75,000 751,000
Granted (994,121) (40,000) (1,034,121)
Canceled / Expired 403,287 - 403,287
========================= ========================= ==========================
Total available for grant 85,166 35,000 120,166
========================= ========================= ==========================
</TABLE>
A summary of the status of the Plans as of December 31, 1996, 1995 and 1994, and
changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------- --------------------------------- ---------------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------------- ------------------- -------------- ------------------ --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 328,950 $12.70 276,950 $11.44 209,875 $10.31
Granted 149,430 12.54 106,000 14.29 86,700 13.94
Exercised (6,950) 8.75 (48,875) 9.17 (11,000) 9.51
Canceled / Expired (29,425) 14.46 (5,125) 11.56 (8,625) 11.52
-------------- ------------------- -------------- ------------------ --------------- -----------------
Outstanding at
end of year 442,005 $12.59 328,950 $12.70 276,950 $11.44
============== =================== ============== ================== =============== =================
Options exercisable
at end of year 225,174 $11.63 154,488 $11.88 139,781 $10.73
============== =================== ============== ================== =============== =================
</TABLE>
<PAGE>
(17) STOCK OPTIONS (CONTINUED)
The following table summarizes information about options outstanding under the
Plans at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Average
Range of Number Remaining Weighted Number Weighted
Exercise Prices Outstanding Contractual Life Average Outstanding Average
Exercise Price Exercise Price
- --------------------------- ---------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$6.14 - $9.213 53,580 2.5 $8.51 53,580 $8.51
$9.875 - $11.825 81,750 2.1 10.79 71,750 10.76
$12.50 - $14.875 306,675 7.9 13.78 99,844 13.93
================ ================= ================ ================= ================
$6.14 - $14.875 442,005 6.2 $12.59 225,174 $11.63
================ ================= ================ ================= ================
</TABLE>
Pro forma net income (loss) and earnings (loss) per share information, as
required by SFAS No. 123, has been calculated as if the Company had accounted
for options granted under the Plans under the fair value method. The fair value
of options granted was estimated as of the date of grant based on the
Black-Scholes option pricing model given the following weighted average
assumptions: risk-free interest rates of 6.39% for 1996 and 6.36% for 1995, a
dividend yield of 3.48% for 1996 and 2.72% for 1995, volatility of the Company's
Common Stock of 7.18%, and an expected life of the stock options of 10 years.
The weighted average grant date fair values of stock options granted during 1996
and 1995 were $5.09 and $5.07, respectively.
For purposes of pro forma disclosures, the estimated fair value is amortized on
a straight-line basis over the vested period.
<TABLE>
<CAPTION>
Dollars in thousands, Year ended Year ended
except per share data December 31, 1996 December 31, 1995
- --------------------------- ------------------------- ------------------------- --------------------------
<S> <C> <C>
Net income (loss) As reported ($ 2,686) $ 3,669
Pro forma (2,797) 3,624
Earnings per share As reported ($ .80) $ 1.10
Pro forma (.83) 1.09
</TABLE>
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION (UNAUDITED)
QUARTERLY FINANCIAL INFORMATION
The quarterly results for the years ended December 31, 1996, 1995 and 1994 are
set forth in the following table:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
---------------- ----------------- ----------------- ----------------
First Second Quarter Third Fourth
Quarter Quarter Quarter
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
1996
Premiums written $23,208 $25,749 $24,719 $23,566
Net premiums earned 21,835 21,535 22,239 22,274
Net investment income 1,807 1,678 1,581 1,741
Net realized gains 1,025 517 325 334
Other revenue 143 81 - (222)
Total revenues 24,810 23,811 24,145 24,129
Net income (loss) 86 (1,311) 1,191 (2,652)
Earnings (loss) per share .03 (.39) .36 (.80)
---------------- ----------------- ----------------- ----------------
First Second Quarter Third Fourth
Quarter Quarter Quarter
---------------- ----------------- ----------------- ----------------
1995
Premiums written $21,799 $25,333 $24,722 $22,330
Net premiums earned 21,233 21,153 21,322 21,462
Net investment income 1,997 1,985 2,016 1,782
Net realized gains (losses) 20 589 634 933
Net unrealized gains (losses) on trading
securities 32 43 (1) 9
Other revenue 181 131 142 343
Total revenues 23,463 23,901 24,113 24,529
Net income (loss) 1,259 1,682 785 (57)
Earnings (loss) per share .38 .50 .23 (.01)
---------------- ----------------- ----------------- ----------------
First Second Quarter Third Fourth
Quarter Quarter Quarter
---------------- ----------------- ----------------- ----------------
1994
Premiums written $21,056 $24,359 $26,722 $22,085
Net premiums earned 19,455 19,482 21,003 21,349
Net investment income 1,649 1,754 1,909 2,105
Net realized gains 181 (159) 128 (85)
Net unrealized gains (losses) on trading
securities (14) (25) 9 (50)
Other revenues 179 248 298 698
Total revenues 21,450 21,300 23,347 24,017
Net income (loss) 1,550 (138) 401 3,228
Earnings (loss) per share .46 (.04) .12 .96
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS-
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1996
(Dollars in thousands)
Column A Column B Column C Column D
Amount
as shown on
Type of investment Cost Value balance sheet
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
United States Government and government
agencies and authorities $ 37,723 $ 37,774 $ 37,774
States, municipalities and political subdivisions 26,034 26,608 26,608
Foreign governments - - -
Public utilities 324 335 335
Convertibles and bonds with warrants attached - - -
All other corporate bonds 31,542 31,552 31,552
--------------- --------------- ----------------
Total bonds 95,623 96,269 96,269
Certificates of deposit 175 175 175
Redeemable preferred stock 6,001 6,050 6,050
--------------- --------------- ----------------
Total fixed maturities 101,799 102,494 102,494
Equity securities:
Common stocks:
Public utilities 121 141 141
Banks, trust and insurance companies 1,583 2,418 2,418
Industrial, miscellaneous and all other 5,513 7,220 7,220
Non-redeemable preferred stocks 3,971 4,253 4,253
--------------- --------------- ----------------
Total equity securities 11,188 14,032 14,032
Mortgage loans on real estate - XXXXXXX -
Real estate - XXXXXXX -
Policy loans - XXXXXXX -
Other long-term investments 2,667 XXXXXXX 2,849
Short-term money-market investments 890 XXXXXXX 890
--------------- --------------- ----------------
Total investments $ 116,544 XXXXXXX $ 120,265
=============== =============== ================
</TABLE>
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION (Parent Company Only)
STATEMENT OF OPERATIONS
(Dollars in thousands)
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
REVENUES:
Management fee income, net $ - $ 734 $ 1,469
Equity in income (loss) of subsidiaries (969) 3,307 4,756
Commissions & fees 2 1,176 1,257
Net investment income 65 201 6
Net realized gains (losses) (5) - -
------------ ------------ -------------
Total revenues (907) 5,418 7,488
EXPENSES:
General and administrative - 1,489 2,217
Merger expenses 710 - -
Lease termination cost 1,300 - -
Interest expense 107 - -
------------ ------------ -------------
Total expenses 2,117 1,489 2,217
Income before income taxes (3,024) 3,929 5,271
Provision for income taxes (benefit) (338) 260 230
------------ ------------ -------------
Net income (loss) $ (2,686) $ 3,669 5,041
============ ============ =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II (continued)
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION (Parent Company Only)
BALANCE SHEETS
(Dollars in thousands)
December 31,
1996 1995
<S> <C> <C>
ASSETS:
Total investments $ 61,083 $ 62,225
Cash and cash equivalents 1,059 2,088
Accrued investment income - 10
Income taxes receivable 21 269
Deferred Federal income tax asset 533 1,235
Due from affiliates - -
Furniture, equipment and improvements 1,078 1,531
Other assets 2,046 2,334
-------------- --------------
Total assets $ 65,820 $ 69,692
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Bank indebtedness $ 12,500 $ 12,500
Due to affiliates 1,166 1,436
Other liabilities 2,222 681
-------------- --------------
Total liabilities 15,888 14,617
-------------- --------------
Stockholders' Equity:
Common stock and additional paid in capital 16,860 17,238
Net unrealized appreciation (depreciation) on equity securities,
net of taxes 2,456 3,074
Retained earnings 30,616 34,763
-------------- --------------
Total stockholders' equity 49,932 55,075
-------------- --------------
Total liabilities and stockholders' equity $ 65,820 $ 69,692
============== ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II (continued)
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION (Parent Company Only)
STATEMENT OF CASH FLOWS
(Dollars in thousands)
Year ended December 31,
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,686) $ 3,669 $ 5,041
Less equity in income of subsidiary 969 (3,307) (4,756)
------------ ------------- --------------
Net income from operations (1,717) 362 285
Adjustments:
Change in income taxes, net 1,268 97 242
Change in accrued investment income 10 - -
Change in due (to) from affiliates (270) 597 (932)
Change in other assets / liabilities 1,829 (1,539) 299
Dividend received from affiliate 500 2,160 1,480
Provision for depreciation and amortization 431 822 958
Realized loss 4 - -
on sale of investments
Purchases of trading securities - (26,644) (13,895)
Sales of trading securities - 26,959 13,703
Realized loss on sale of fixed assets 36 6 -
------------ ------------- --------------
Net cash provided (used) 2,091 2,820 2,140
------------ ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from investments sold, matured,
called or repaid 995 - -
Cash paid for investments acquired (2,262) - -
Amortization of premium on bonds - (632) 632
Capital expenditures, net (14) (256) (871)
------------ ------------- --------------
Net cash provided (used) (1,281) (888) (239)
------------ ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of surplus note from subsidiary 1,000 - -
Proceeds from common stock issuance 299 448 110
Repurchase of common stock (676) (375) (467)
Capital contribution to subsidiaries (1,000) (938) -
Dividends paid (1,462) (940) (852)
------------ ------------- --------------
Net cash from financing activities (1,839) (1,805) (1,209)
------------ ------------- --------------
Net increase (decrease) (1,029) 127 692
Cash and cash equivalents, beginning 2,088 1,961 1,269
------------ ------------- --------------
Cash and cash equivalents, ending $ 1,059 $ 2,088 $ 1,961
============ ============= ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SCHEDULE II (continued)
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION (Parent Company Only)
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed financial statements include the accounts of
Amwest Insurance Group, Inc. (the "Parent Company"). The Parent
Company's wholly-owned subsidiaries, Amwest Surety Insurance Company,
Far West Insurance Company, Far West Bond Services, Condor Insurance
Company and Raven Claims Services, Inc. are not presented as
consolidated entities on these condensed financial statements.
On March 14, 1996, the Parent Company completed its previously
announced merger with Condor Services, Inc. ("Condor Services"), an
unaffiliated insurance holding company. In the merger, each outstanding
share of Condor Services' common stock (other than shares owned by
Condor Services as treasury stock or by the Company) were converted
into the right to receive 0.5 of a share of the Company's common stock.
In connection with the merger, the Parent Company issued 992,000 shares
of common stock.
The merger has been accounted for under the pooling of interests
method. Accordingly, all financial information presented herein for all
periods includes Condor Services. Additionally, share and per
share data presented in these financial statements reflect the
retroactive effects of the merger with Condor Services.
2. Material Contingencies
The Parent Company is the subject of certain claims arising in the
ordinary course of its operations. The Parent Company believes that the
ultimate resolution of such matters will not materially affect its
financial condition.
3. Long-Term Obligations and Guarantees
On August 6, 1993, the Parent Company entered into a revolving credit
agreement with Union Bank for $12,500,000. The debt agreement was
amended on April 24, 1995 and again on July 10, 1996 to increase the
amount available under the revolving line of credit from $12,500,000 to
$15,000,000. The amounts available are reduced by $3,000,000 each year
beginning on September 30, 1997 and ending on September 30, 2001.
Accordingly at December 31, 1996, $15,000,000 is available under the
revolving line of credit, $12,500,000 of which is currently utilized.
The bank loan has a variable rate based upon fluctuations in the London
Interbank Offered Rate (LIBOR) and amortizing principal payments.
<PAGE>
The Board of Directors
Amwest Insurance Group, Inc.:
We consent to incorporation by reference in registration statements Nos.
33-11020, 33-24243 and 33-38128 on Form S-8 and in registration statements Nos.
33-28645 and 33-37984 on Form S-3 of Amwest Insurance Group, Inc. of our reports
dated February 21, 1997, relating to the consolidated balance sheets of Amwest
Insurance Group, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows and related schedules for each of the years in the three-year
period ended December 31, 1996, which reports appear in the December 31, 1996
annual report on Form 10-K of Amwest Insurance Group, Inc.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 28, 1997
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Amwest Insurance Group, Inc.:
Under date of February 21, 1997, we reported on the consolidated balance sheets
of Amwest Insurance Group, Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996, as contained in the annual report on Form 10-K
for the year 1996. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related consolidated
financial statement schedules as listed in the accompanying index. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 21, 1997
RESTATED REVOLVING CREDIT AGREEMENT
dated as of
July 10, 1996
between
AMWEST INSURANCE GROUP, INC.
("Borrower")
and
UNION BANK OF CALIFORNIA, N.A.
( "Bank" )
$17,500,000
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS AND INTERPRETATIONS
Page(s)
SECTION 1.1 Definitions 1
SECTION 1.2 Accounting Terms and Determinations 12
SECTION 1.3 Computation of Time Periods 13
SECTION 1.4 Construction 13
SECTION 1.5 Exhibits and Schedules 13
SECTION 1.6 No Presumption Against Any Party 13
SECTION 1.7 Independence of Provisions 13
ARTICLE II
THE CREDIT
SECTION 2.1 The Revolving Commitment 14
SECTION 2.2 Payment of Excess Obligations 14
SECTION 2.3 Interest Rates 14
SECTION 2.4 Notice of Borrowing Requirements 15
SECTION 2.5 Conversion or Continuation Requirements 16
SECTION 2.6 Eurodollar Costs 17
SECTION 2.7 Special Eurodollar Circumstances 18
SECTION 2.8 Revolving Note; Statements of Obligations 18
SECTION 2.9 Holidays 19
SECTION 2.10 Time and Place of Payments 19
SECTION 2.11 Fees 19
SECTION 2.12 Mandatory Commitment Reductions 20
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BORROWER
SECTION 3.1 Due Organization 20
SECTION 3.2 Requisite Power 21
SECTION 3.3 Binding Agreements 21
SECTION 3.4 No Conflict 21
SECTION 3.5 Litigation 21
SECTION 3.6 Consents 22
SECTION 3.7 Financial Statements and Condition 22
SECTION 3.8 Use of Loans Proceeds 22
<PAGE>
SECTION 3.9 Regulation U 22
SECTION 3.10 Tax Returns 22
SECTION 3.11 Trademarks, Licenses, etc 23
SECTION 3.12 Burdensome Agreements, etc 23
SECTION 3.13 Title and Liens 23
SECTION 3.14 Other Information 23
SECTION 3.15 Existing Defaults 23
SECTION 3.16 Leases 24
SECTION 3.17 Casualty 24
SECTION 3.18 Investment Company Act 24
SECTION 3.19 Public Utility Holding Company Act 24
SECTION 3.20 Disclosure 24
SECTION 3.21 Location of Chief Executive Office 24
SECTION 3.22 No Default 25
SECTION 3.23 No Pension Fund Irregularities 25
SECTION 3.24 Compliance With Law 25
ARTICLE IV
CONDITIONS TO LOANS
SECTION 4.1 Conditions Precedent to the Loans 26
ARTICLE V
AFFIRMATIVE COVENANTS
SECTION 5.1 Accounting Records 27
SECTION 5.2 Financial Statements and Reports 27
SECTION 5.3 Corporate Existence 30
SECTION 5.4 Compliance With Law 30
SECTION 5.5 Insurance 31
SECTION 5.6 Properties 31
SECTION 5.7 Taxes and Other Liabilities 31
SECTION 5.8 Tax Returns 31
SECTION 5.9 Fixed Charge Coverage Ratio 31
SECTION 5.10 (Intentionally Deleted) 32
SECTION 5.11 Tangible Net Worth 32
SECTION 5.12 Net Profit 32
SECTION 5.13 Policyholders' Surplus 32
SECTION 5.14 Operating Leverage Ratio 32
SECTION 5.15 A.M. Best Rating 32
SECTION 5.16 Investment Portfolio Quality 32
SECTION 5.17 Pension Plan Funding 32
SECTION 5.18 Reinsurance Contract 33
SECTION 5.19 Storage and Protection of Data 33
<PAGE>
ARTICLE VI
NEGATIVE COVENANTS
SECTION 6.1 Mergers, Consolidations 34
SECTION 6.2 Sale of Assets 34
SECTION 6.3 Liens 34
SECTION 6.4 Contingent Obligations 35
SECTION 6.5 Conduct of Business 35
SECTION 6.6 Transactions with Shareholders 36
SECTION 6.7 Restrictive Agreements 36
SECTION 6.8 Debt 36
SECTION 6.9 Dividends 36
SECTION 6.10 Leases 37
SECTION 6.11 Stock 37
SECTION 6.12 Prepayment and Repayment of Debt 37
SECTION 6.13 Sale-Leasebacks 37
SECTION 6.14 Misrepresentations 37
SECTION 6.15 Partnerships 37
SECTION 6.16 Subsidiaries Debt and Liens 37
SECTION 6.17 Changes in Location of Chief Executive Office 38
SECTION 6.18 Loss Reserves 38
SECTION 6.19 Surplus Note 38
SECTION 6.20 Capitalized Expenditures 38
SECTION 6.21 Acquisitions 38
ARTICLE VII
EVENTS OF DEFAULT
SECTION 7.1 Events of Default 39
SECTION 7.2 Remedies 41
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 Waivers, Modifications in Writing 41
SECTION 8.2 Failure or Delay 42
SECTION 8.3 Notices, etc 42
SECTION 8.4 Costs and Expenses 42
SECTION 8.5 Sale of Participation 43
SECTION 8.6 Headings 43
SECTION 8.7 Execution in Counterparts 43
SECTION 8.8 Binding Effect; Assignment 43
SECTION 8.9 Severability of Provisions 43
SECTION 8.10 Publicity 44
SECTION 8.11 Complete Agreement 44
SECTION 8.12 Governing Law and Venue 44
SECTION 8.13 Dispute Resolution 44
<PAGE>
EXHIBITS AND SCHEDULES
Schedule 1 Reserved
Schedule 2 Permitted Liens
Schedule 3 Contingent Obligations
Schedule 4 Permitted Debt
Schedule 5 Permitted Partnerships
Schedule 6 Litigation
Exhibit 1 Surplus Note
Exhibit 2 Notice of Borrowing
Exhibit 3 Notice of Continuation or Conversion
Exhibit 4 Compliance Certificate
<PAGE>
RESTATED REVOLVING CREDIT AGREEMENT
This RESTATED REVOLVING CREDIT AGREEMENT, dated as of July 10,
1996, is entered into between Borrower and Bank.
The parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND INTERPRETATIONS
SECTION 1.1 Definitions. The following terms, as used herein, shall
have the following meanings:
"Affiliate" means, with respect to any designated Person, any Person
that, directly or indirectly, controls, is controlled by or is under common
control with such designated Person; and, for purposes of the foregoing
"control" (including "controlled by" and "under common control with") with
respect to any Person shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
Person, whether through the ownership of voting securities, by contract or
otherwise. An "Affiliate" of Borrower shall not include Richard or John Savage.
"Agreement" means this Revolving Credit Agreement, together with any
concurrent or subsequent rider, amendment, schedule or exhibit to this Revolving
Credit Agreement.
"Applicable Base Rate Margin" and "Applicable Eurodollar Rate Margin"
means the percentage per annum set forth in the table below opposite the
Interest Coverage for the most recently ended four fiscal quarters for which
Financial Statements have been delivered to Bank pursuant to Sections 5.2(a) or
5.2(b) and the Interest Rate Leverage Ratio as of the end of such the last
quarter or, if the respective percentages per annum set forth opposite such
Interest Coverage and such Interest Rate Leverage Ratio are different, the
higher of such percentages per annum.
<PAGE>
Interest Rate Applicable
Applicable Applicable
Leverage Ratio Base Lending Rate Eurodollar Lending
Margin Margin
.30 less than x .50% 2.00%
.25 less than x less than .30 .25% 1.75%
.20 less than x less than .25 .00% 1.50%
.15 less than x less than .20 .00% 1.25%
x less than .15 .00% 1.00%
"ASIC" means Amwest Surety Insurance Company, a Subsidiary of
the Borrower.
"Asset" means any interest of a Person in any kind of property
or asset, whether real, personal, or mixed real and personal, and whether
tangible or intangible.
"Bank" means Union Bank of California, N.A., successor
in interest to Union Bank, a California banking corporation. "Bank" or
"Union Bank" when referred to in this agreement shall mean Union
Bank of California, N. A.
"Bank Expenses" means all costs or expenses paid or advanced
by Bank which are required to be paid by Borrower under this Agreement and all
other documents executed in connection herewith; taxes and insurance premiums of
every nature and kind of Borrower paid by Bank; appraisal, filing, recording,
documentation, publication and search fees paid or incurred by Bank to correct
any default or enforce any provision of this Agreement and all other documents
executed in connection herewith; to the extent reimbursable under Section 8.4,
costs and expenses of suit or arbitration proceeding incurred by Bank in
enforcing or defending this Agreement, or any portion hereof, and reasonable
attorneys' fees and expenses incurred by Bank in structuring, drafting,
reviewing, amending, terminating, enforcing, defending or concerning this
Agreement and all other documents executed in connection herewith, whether or
not suit is brought, such attorneys' fees to include the reasonable estimate of
the allocated costs and expense of Bank's legal counsel and professional staff.
All Bank Expenses paid or incurred by Bank shall be considered to be, and shall
become a part of the Obligations, are payable, except as otherwise provided
herein, within 10 days after demand, and if not reimbursed, shall immediately
thereafter bear interest, together with all other amounts to be paid by Borrower
pursuant hereto at the Base Rate.
"Bank's Fees" means the Revolving Commitment Fee.
"Bankruptcy Code" means The Bankruptcy Reform Act of 1978
(Pub. L. No. 95-598; 11 U.S.C. Section 101-1330), as amended or supplemented
from time to time, or any successor statute, and any and all rules and
regulations issued or promulgated in connection therewith.
<PAGE>
"Base Rate" means the sum of the Reference Rate Plus the
Applicable Base Rate Margin.
"Base Rate Borrowing" means any Borrowing designated by
Borrower as bearing the Base Rate pursuant to Section 2.3(a) or 2.5(a) .
"Base LIBOR" means the offered quotation, if any, to
first-class banks in the Eurodollar market by Bank for U.S. Dollar deposits of
amounts in funds comparable to the principal amount of the Eurodollar Rate
Borrowing for which the Eurodollar Rate is being determined with maturities
comparable to the Interest Period for which such Eurodollar Rate will apply as
of approximately 10:00 a.m., California time, two (2) Eurodollar Business Days
prior to the commencement of such Interest Period.
"Borrower" means AMWEST INSURANCE GROUP, INC.
"Business Day" means a borrowing pursuant to the terms of
Section 2.1 consisting of Revolving Loans made by Bank to Borrower.
"Business Day" means any day other than a Saturday, a Sunday,
or a day on which commercial banks in the City of Los Angeles, California are
authorized or required by law or executive order or decree to close.
"Cash Equivalents" means, when used in connection with any
Person, that Person's Investment in:
(a) Government Securities due within one year after the date
of determination;
(b) Readily marketable direct obligations of any State of the
United States of America or any political subdivision of any such State given on
the date of such investment a credit rating of at least A by Moody's Investments
Service, Inc. or A by Standard & Poor's Corporation, in each case due within one
year from the date of determination;
(c) Certificates of deposit issued by, bank deposits in,
eurodollar deposits through, bankers' acceptances of, and reverse repurchase
agreements covering Government Securities ("Qualified Bank Deposits") executed
by, the Bank or any other bank, savings and loan or savings bank doing business
in and incorporated under the Laws of the United States of America or any State
thereof and having on the date of such Investment combined capital, surplus and
undivided profits of at least $250,000,000 ("Qualified Domestic Institutions"),
in each case due within one year after the date of determination;
<PAGE>
(d) Qualified Bank Deposits executed by, any branch or office
located in the United States of America of a bank incorporated under the Laws of
any jurisdiction outside the United States of America having on the date of such
Investment combined capital, surplus and undivided profits of at least
$500,000,000 ("Qualified Foreign Institution"), in each case due within one year
after the date of determination;
(e) Readily marketable commercial paper of corporations doing
business in and incorporated under the Laws of the United States of America or
any State thereof given on the date of such Investment the highest or second
highest credit rating by Moody's Investors Service, Inc. and Standard & Poor's
Corporation, in each case due within 270 days after the date of the
determination;
(f) Money Market Funds investing in securities otherwise
constituting Cash Equivalents;
Provided that, the portion of Qualified Bank Deposits not executed by a
Qualified Domestic Institution, or Qualified Foreign Institution, which are
insured by the Federal Deposit Insurance Corporation, the Federal Savings and
Loan Insurance Corporation or the Securities Investor Protection Corporation
shall be considered Cash Equivalents.
"Capitalized Expenditures" means, when used in connection with
any Person, any expenditure by such Person that, in conformity with GAAP, has
been or should be included in the furniture equipment and improvements reflected
in the Person's balance sheet, excluding, however, any Investment.
"Capital Surplus" means the "surplus as regards policyholders"
of ASIC and its Subsidiaries as set forth in the consolidated statements of ASIC
and its Subsidiaries as filed with the California Department of Insurance.
"Closing Date" means July 10, 1996.
"Commitment Reduction" means, for each applicable Revolving
Commitment Reduction Date, that amount expressed in Dollars indicated in the
table in Section 2.12 opposite the applicable Revolving Commitment Reduction
Date.
"Contingent Obligation" means, as to any Person, any (a)
direct or indirect guarantee of Indebtedness of, or other obligation performable
by, any other Person, including any endorsement (other than for collection or
deposit in the ordinary course of business), co-making or sale with recourse of
the obligations of any other Person or (b) assurance given to an obligee with
respect to the performance of an obligation by, or the financial condition of,
any other Person, whether direct, indirect or contingent, including any purchase
or repurchase agreement covering such obligation or any collateral security
therefor, any agreement to provide funds (by means of loans, capital
contributions or otherwise) to such other Person, any agreement to support the
solvency or level of any balance sheet item to such other Person, or any
"keep-well", "take-or-pay" or "through put" or any other arrangement of whatever
nature having the effect of assuring or holding harmless any obligee against
loss with respect to any obligation of such other Person. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determinable amount of the related primary obligation (unless the Contingent
Obligation is limited by its terms to a lesser amount, in which case to the
extent of such amount) or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by the Person in good
faith, provided however, Contingent Obligation shall not include surety bonds
and other insurance products issued by the Borrower or any of its subsidiaries
in the ordinary course of Borrower or its Subsidiaries business.
<PAGE>
"Credit Document(s)" means each of the following documents,
instruments, and agreements individually or collectively, as the context
requires:
(i) the Revolving Note; and
(ii) such other documents, instruments,and agreements
as Bank may reasonably request in connection with the transactions contemplated
hereunder.
"Daily Balances" means the amount determined by taking the
amount of the obligations owed under the Revolving Loans at the beginning of a
given day, adding any new obligations advanced or incurred on such date, and
subtracting any payments or collections which are deemed to be paid on that date
under the provisions of this Agreement.
"Debt" means the outstanding aggregate principal balance of
the Revolving Loans plus all of Borrower's consolidated Capitalized Lease
Obligations and any indebtedness heretofore or hereafter created, issued,
guaranteed, incurred or assumed by Borrower (directly or indirectly) for or in
respect of money borrowed or for or in respect of the deferred purchase price of
property or services purchased (other than trade accounts payable arising in the
ordinary course of business).
"Default" means any condition or event which constitutes an
Event of Default or which with the giving of notice or lapse of time or both
would, unless cured or waived, become an Event of Default.
"Dollars" or "$" means lawful currency of the United States of
America.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and unless the context otherwise requires,
the regulations thereunder.
"ERISA Affiliate" means the Borrower and all members of a
controlled group of corporations and all trades or businesses (irrespective of
whether incorporated) under common control that, together with the Borrower, are
treated as a single employer under subsection (b), (c), (m) or (o) of Section
414 of the Internal Revenue Code or the regulations promulgated thereunder.
"ERISA Group" means Borrower and all members of a controlled
group of corporations and all trades or businesses (whether or not incorporated)
under common control which, together with such Borrower are treated as a single
employer under Section 414 of the Internal Revenue Code.
<PAGE>
"Eurodollar Business Day" means any Business Day on which
major commercial banks are open for international business (including dealings
in Dollar deposits) in Los Angeles, California and London, England.
"Eurodollar Rate" means, with respect to a Eurodollar Rate
Borrowing, the rate per annum (rounded upwards if necessary to the nearest whole
one-hundredth of one percent (.01%)), determined as the sum of: (a) the quotient
of:
(i) Base LIBOR for the relevant Interest Period; divided by
(ii) the number (expressed as a decimal) equal to one hundred percent
(100%) in the LIBOR Reserve Percentage; plus (b) the Applicable Eurodollar Rate
Margin. The Eurodollar Rate shall be adjusted automatically on the effective
date of any change in the LIBOR Reserve Percentage, such adjustment to affect
any Eurodollar Rate Borrowings outstanding on such effective date to the extent
such change is applied retroactively to eurocurrency funding of a member bank in
the Federal Reserve System. Each determination of a eurodollar Rate by Bank,
including, but not limited to, any determination as to the applicability or
allocability of reserves to eurocurrency liabilities or as to the amount of such
reserves, shall be conclusive and final in the absence of manifest error.
"Eurodollar Rate Borrowing" means any Borrowing designated by
Borrower as bearing the Eurodollar Rate pursuant to Sections 2.3(a) or 2.5(a).
"Event of Default" has the meaning set forth in Section7.1.
"Financial Statement(s)" means, with respect to any accounting
period of any Person, statements of operations and of cash flows of such Person
for such period, and balance sheets of such Person as of the end of such period,
setting forth in each case in comparative form figures for the corresponding
period in the preceding fiscal year or, if such period is a full fiscal year,
corresponding figures from the preceding annual audit, all prepared in
reasonable detail and in accordance with GAAP. "Financial Statement(s)" shall
include the notes and schedules thereto.
<PAGE>
"Fiscal Year" shall mean the calendar year.
"Funds Held as Collateral" means, as of any date of
determination, the amount that should, in accordance with GAAP, be reflected in
a consolidated balance sheet of Borrower and its Subsidiaries on that date,
prepared consistently with the consolidated balance sheet of Borrower and its
Subsidiaries for the Fiscal Year of Borrower and identified as "funds held as
collateral."
"GAAP" means generally accepted accounting principles in the
United States of America, consistently applied, which are in effect as of the
date of their application.
"Government Securities" means readily marketable direct full
faith and credit obligations of the United States of America or obligations
unconditionally guaranteed or backed by the full faith and credit of the United
States of America.
"Insolvency Proceeding" means any proceeding commenced by or
against any Person, under any provision of the Bankruptcy Code, or under any
other bankruptcy or insolvency law, including, but not limited to, assignments
for the benefit of creditors, formal or informal moratoriums, compositions, or
extensions with some or all creditors.
"Interest Coverage" means Cash Operating Income divided by
interest expense for the Borrower and its Subsidiaries on a consolidated basis.
Cash Operating Income equals pre-tax income plus interest expense, plus
amortization of bond premiums, less accretion of bond discounts, less gain on
sale of investments, plus loss on sale of investments, plus depreciation and
amortization expense.
"Interest Rate Leverage Ratio" means (as it pertains to the
interest rate determination) total liabilities divided by total assets for the
Borrower and its Subsidiaries on a consolidated basis.
"Interest Payment Date" means July 31, 1996 and the last day
of every month thereafter or, with respect to Eurodollar Rate Borrowings, the
last day of the Interest Period applicable to each outstanding Eurodollar Rate
Borrowing unless the Interest Period is greater than three months in which case
interest is payable at the end of each three month period during such period and
at the end of the Interest Period.
"Interest Period" means, with respect to each Eurodollar Rate
Borrowing, the period commencing on the date of such Eurodollar Rate Borrowing
and ending one (1), two (2), three (3), six (6) or more (with Bank's prior
written consent) months thereafter, as Borrower may elect pursuant to the
applicable Notice of Borrowing or Notice of Conversion or Continuation;
provided, however, that:
<PAGE>
(a) any Interest Period which would otherwise end on a day
which is not a Eurodollar Business Day shall be extended to the next succeeding
Eurodollar Business Day unless such Eurodollar Business Day falls in another
calendar month in which case such Interest Period shall end on the next
preceding Eurodollar Business Day; and
(b) any Interest Period which begins on the last Eurodollar
Business Day of the calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Eurodollar Business Day of the calendar month in
which it would have ended if there were a numerically corresponding day in such
calendar month.
"Internal Revenue Code" means the Internal Revenue Code of
1986, as supplemented and amended from time to time, or any successor statute,
and any and all regulations and . rules promulgated thereunder.
"Invested Assets" means, as of any date of determination, the
amount that should, in accordance with GAAP be reflected in a consolidated
balance sheet of Borrower and its Subsidiaries on that date, prepared
consistently with the consolidated balance sheet of Borrower and its
Subsidiaries for the Fiscal Year of Borrower and identified as "investments."
"Investment" means, as applied to any Person, any direct or
indirect purchase or other acquisition by that Person of, or beneficial interest
in, stock or other securities of any other Person, or any direct or indirect
loan, advance (other than advances to employees for moving, travel, and payroll
expenses, drawing accounts and similar expenditures in the ordinary and usual
course of business) or capital contribution by that Person to any other Person,
including all indebtedness and accounts receivable due from that other Person
which are not current assets or did not arise from sales to that other Person in
the ordinary and usual course of business. The amount of any Investment shall be
the original cost of such Investment plus the cost of all additions thereto,
without any adjustments, except as permitted by generally accepted accounting
principles, for increases or decreases in value, or write-ups, write-downs or
write-offs with respect to such Investment.
"Investment Income" means the "investment income," determined
in accordance with GAAP, for the twelve (12) month period immediately preceding
the applicable fiscal quarter end.
"Lending Office" means Bank's office located at its address
set forth on the signature pages hereof, or such other office of Bank as it may
hereafter designate as its Lending Office by notice to Borrower.
<PAGE>
"Leverage Ratio" means the ratio of (a) funded Debt to Union
Bank to (b) Tangible Net Worth, measured as of the last day of each fiscal
quarter.
"LIBOR Reserve Percentage" means, as of the date of
determination thereof, the percentage (rounded upward to the nearest
one-hundredth of one percent (.01%)), as determined by Bank in accordance with
its usual procedures (which determination shall be conclusive in the absence of
manifest error), representing the actual, aggregate incremental reserve
requirement of the Bank as prescribed by the Board of Governors of the Federal
Reserve System with respect to new nonpersonal time deposits in the form of
eurocurrency (currently referred to as "eurocurrency liabilities") in an amount
equal to the particular Loan and for a time period comparable to the number of
days in the applicable Interest Period.
"Lien" means any mortgage, deed of trust, pledge, security
interest, assignment, conditional sale or other title retention agreement, lien,
charge or encumbrance of any kind.
"Liquidity Ratio" means the ratio of (a) Cash plus Cash
Equivalents plus Invested Assets plus accrued Investment Income to (b) Total
Liabilities less the long term portion of Debt to the Bank hereunder and other
long term liabilities of the Borrower and its Subsidiaries determined as of the
last day of each fiscal quarter.
"Mandatory Commitment Reductions" means, as of the date of
determination, the aggregate amount of the Commitment Reduction required.
"Material Adverse Change" means a material adverse change in
(i) the business, Assets, condition (financial or otherwise) or results of
operations of Borrower and its Subsidiaries taken as a whole, (ii) the ability
of Borrower to perform its obligations under this Agreement (including, without
limitation, repayment of the Obligations as they come due) or (iii) the validity
or enforceability of this Agreement, the Credit Documents, or the rights or
remedies of Bank hereunder and thereunder.
"Maturity Date" means September 30, 2001.
"Multiemployer Plan" means a "multiemployer plan" as defined
in ss. 4001(a) (3) of ERISA, Section 414 of the Code, or Section 3(37) of ERISA
to which any member of the ERISA Group is then making or accruing an obligation
to make contributions or has within the preceding five plan years made
contributions, including for these purposes any Person which ceased to be a
member of the ERISA Group during such five year period.
"Net Profit" means a net profit of Borrower, pursuant to GAAP,
on a consolidated basis, for each fiscal year excluding any gains or (losses)
related to "accounting changes".
<PAGE>
"Net Written Premiums" means the net premiums written by ASIC
and its Subsidiaries as set forth in the annual consolidated statement of ASIC
and its Subsidiaries filed with the California Department of Insurance.
"Notice of Borrowing" means an irrevocable notice from
Borrower to Bank of Borrower's request for a Borrowing pursuant to the terms of
Section 2.4(b), substantially in the form of Exhibit 3.
"Notice of Conversion or Continuation" means a written notice
given pursuant to the terms of Section 2.5(b), substantially in the form of
Exhibit 4.
"Obligations" mean any and all indebtedness, liabilities, and
obligations of Borrower owing to Bank and to its successors and assigns,
previously, now, or hereafter incurred, and howsoever evidenced, whether direct
or indirect, absolute or contingent, joint or several, liquidated or
unliquidated, voluntary or involuntary, due or not due, legal or equitable,
whether incurred before, during, or after any Insolvency Proceeding, and whether
recovery thereof is or becomes barred by a statute of limitations or is or
becomes otherwise unenforceable or unallowable as claims in any Insolvency
Proceeding, together with all interest thereupon (including all interest
accruing during the pendency of an Insolvency Proceeding), and all Bank
Expenses. The Obligations shall include, without limiting the generality of the
foregoing, all principal and interest owing under the Revolving Loans, all
Bank's Fees, all Bank Expenses, any other fees and expenses due hereunder, and
all other indebtedness evidenced by this Agreement and the Revolving Note.
"Operating Leverage Ratio" means Net Written Premiums over the
most recent four quarters divided by Capital Surplus as of the most recent
quarterly ending date.
"PBGC" means the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"Permitted Liens" is defined in Section 6.3.
"Person" means and includes natural persons, corporations,
limited partnerships, general partnerships, joint stock companies, joint
ventures, associations, companies, trusts, banks, trust companies, land trusts,
business trusts, or other organizations, irrespective of whether they are legal
entities, and governments and agencies and political subdivisions thereof.
"Plan" means an "employee benefit plan" as defined in Section
3(3) of ERISA in which any personnel of either Borrower or an ERISA Affiliate
participate or from which any such personnel may derive a benefit, excluding any
Multiemployer Plan, but including any plan either established or maintained by
such Borrower or any ERISA Affiliate or to which such Person contributes under
the laws of any foreign country.
<PAGE>
"Prohibited Transaction" means a transaction that is
prohibited under Section 4975 of the Internal Revenue Code or Section 406 or 407
of ERISA and not exempt under Section 4975 of the Internal Revenue Code or
Section 408 of ERISA.
"Reference Rate" means the rate of interest announced by Bank
at its corporate headquarters as its reference rate and which serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto. The Reference Rate is determined by Bank from time to
time as a means of pricing credit extensions to some customers and is neither
directly tied to some external rate of interest or index nor necessarily the
lowest rate of interest charged by Bank at any given time for any particular
class of customers or credit extensions.
"Reportable Event" means a reportable event described in
Section 4043 of ERISA, a withdrawal from a Plan described in Section 4063 of
ERISA, or a substantial cessation of operations described in Section 4062(e) or
ERISA.
"Responsible Officer" means the president or chief financial
officer, or any other Person designated by the president or chief financial
officer in a writing delivered to Bank.
"Revolving Commitment" means subject to Section 2.12,
Seventeen Million Five Hundred Thousand Dollars ($17,500,000); provided that on
each Revolving Commitment Reduction Date, the Revolving Commitment in effect
immediately prior to such date shall be reduced by the Commitment Reduction for
that date.
"Revolving Commitment Fee" has the meaning set forth in
Section 2.11.
"Revolving Commitment Reduction Date" means each of the dates
set forth in the table in Section 2.12.
"Revolving Commitment Reduction Payment" means a payment in an
amount which is necessary in order to reduce the aggregate outstanding principal
balance of the Revolving Loans to the amount of the Revolving Commitment as
reduced on the applicable Revolving Commitment Reduction Date by the Commitment
Reduction in effect on such date, plus all accrued interest on such amount.
"Revolving Loans" means the revolving loans made by Bank to
Borrower pursuant to the terms of Section 2.1.
"Revolving Note" means that certain Revolving Note, dated as
of even date herewith, executed by Borrower to the order of Bank, in the
principal amount of Seventeen Million Five Hundred Thousand Dollars
($17,500,000), and any replacements, substitution, renewals, refinancings or
restatements thereof.
<PAGE>
"Subsidiary" means any corporation (whether now existing or
hereafter organized or acquired) of which a Person or one or more Subsidiaries
of such Person at the time owns or controls directly or indirectly more than 50%
of the shares of stock having general voting power under ordinary circumstances
to elect a majority of the board of directors, managers or trustees of such
corporation (irrespective of whether at the time stock of any other class or
classes shall have or might have voting power by reason of the happening of any
contingency).
"Surplus Note" means that certain $10,000,000 Certificate of
Contribution issued by Amwest Surety Insurance Company to Borrower, a copy of
which is attached hereto as Exhibit 1, either as originally executed or as the
same may from time to time be supplemented, modified, amended, renewed, extended
or supplanted.
"Tangible Net Worth" means stockholders' equity of Borrower
and its Subsidiaries as determined in accordance with GAAP consistently applied
but excluding the effect of FASB 115, increased by debt subordinated to Bank and
decreased by the following: licenses, trademarks, trade names, goodwill,
subscription lists, organization expenses and other intangible assets (but
"intangible assets" shall exclude deferred policy acquisition costs), as
determined in accordance with GAAP.
"Total Liabilities"means total liabilities as defined by GAAP.
"Unfunded Liabilities" means, with respect to any Plan at any
time, the amount (if any) by which (i) the present value of all benefits under
such Plan exceeds (ii) the fair market value of all Plan assets allocable to
such benefits (excluding any accrued but unpaid contributions), all determined
as of the then most recent valuation date for such Plan, but only to the extent
that such excess represents a potential liability of a member of the ERISA Group
to the PBGC or an appointed trustee under Title IV of ERISA.
SECTION 1.2 Accounting Terms and Determinations. Unless
otherwise specified herein, all accounting terms used herein shall be
interpreted, all accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder shall be prepared in
accordance with GAAP; provided, however, that if the Borrower notifies the Bank
that the Borrower wishes to amend any covenant in Article V or VI to eliminate
the effect of any change in GAAP or an adverse ruling with respect to Prop 103
on the operation of such covenant, then the Borrower's compliance with such
covenant shall be determined on the basis of GAAP in effect immediately before
the relevant change in GAAP became effective or without giving effect to such
ruling as the case may be until either such notice is withdrawn or such covenant
is amended in a manner satisfactory to the Borrower and the Bank.
<PAGE>
SECTION 1.3 Computation of Time Periods. In this Agreement,
with respect to the computation of periods of time from a specified date to a
later specified date, the word "from" means "from and including" and the words
"to" and "until" each mean "to but excluding." Periods of days referred to in
this Agreement shall be counted in calendar days unless otherwise stated.
SECTION 1.4 Construction. Unless the context of this Agreement
clearly requires otherwise, references to the plural include the singular and to
the singular include the plural, references to any gender include any other
gender, the part includes the whole, the term: "including" is not limiting, and
the term "or" has, except where otherwise indicated, the inclusive meaning
represented by the phrase "and/or." References in this Agreement to
"determination" by Bank include good faith estimates by Bank (in the case of
quantitative determinations), and good faith beliefs by Bank (in the case of
qualitative determinations). The words "hereof," "herein," "hereby,"
"hereunder," and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. Article, section,
subsection, clause, exhibit and schedule references are to this Agreement,
unless otherwise specified. Any reference in this Agreement or any of the Credit
Documents to this Agreement or any of the Credit Documents includes any and all
permitted alterations, amendments, changes, extensions, modifications, renewals,
or supplements thereto or thereof, as applicable.
SECTION 1.5 Exhibits and Schedules. All of the exhibits and
schedules attached hereto shall be deemed incorporated herein by reference.
SECTION 1.6 No Presumption Against Any Party. Neither this
Agreement, any of the Credit Documents, any other document, agreement, or
instrument entered into in connection herewith, nor any uncertainty or ambiguity
herein or therein shall be construed or resolved using any presumption against
any party hereto, whether under any rule of construction or otherwise. On the
contrary, this Agreement, the Credit Documents, and the other documents,
instruments, and agreements entered into in connection herewith have been
reviewed by each of the parties and their counsel and shall be construed and
interpreted according to the ordinary meanings of the words used so as to
accomplish fairly the purposes and intentions of all parties hereto.
SECTION 1.7 Independence of Provisions. All agreements and
covenants hereunder, under the Credit Documents, and the other documents,
instruments, and agreements entered into in connection herewith shall be given
independent effect such that if a particular action or condition is prohibited
by the terms of any such agreement or covenant, the fact that such action or
condition would be permitted within the limitations of another agreement or
covenant shall not be construed as allowing such action to be taken or condition
to exist.
<PAGE>
ARTICLE II
THE CREDIT
SECTION 2.1 The Revolving Commitment.
(a) Revolving Loans. Subject to the terms and conditions
hereof, Bank agrees to make Revolving Loans to Borrower, pursuant to this
Section 2.1, from the Closing Date to but not including the Maturity Date, in an
aggregate principal amount not to exceed the amount of the Revolving Commitment
then in effect. Provided that no Default or Event of Default has occurred and is
continuing, Borrower may borrow, and reborrow such sum in increments of One
Hundred Thousand Dollars ($100,000) upon notice in accordance with the
provisions of Section 2.4.
(b) Payments of Principal and Interest. All interest on all
Revolving Loans, as calculated in accordance with Section 2.3, shall be payable,
in arrears, on each and every Interest Payment Date. All outstanding principal
of and all accrued but unpaid interest on all Revolving Loans shall be due and
payable on the Maturity Date.
(c) Prepayments. The Revolving Loans may be prepaid at any
time without penalty or premium (except as provided in Section 2.6) upon three
(3) Eurodollar Business Days' prior written notice, in the case of Eurodollar
Rate Borrowings, and upon one (1) Business Day's prior written notice, in the
case of Base Rate Borrowings, to Bank. All prepayments shall be in increments of
One Hundred Thousand Dollars ($100,000).
SECTION 2.2 Payment of Excess Obligations. Any
and all Revolving Loans and financial accommodations made,
extended, or arranged by Bank to or for the benefit of Borrower pursuant to this
Agreement shall be added to and be deemed part of the Obligations when made or
extended. If, at any time and for any reason, the amount of the Obligations
exceeds the Revolving Commitment then in effect, then Borrower, upon Bank's
election and demand, shall immediately pay to Bank in immediately available
funds, the amount of such excess.
SECTION 2.3 Interest Rates. The unpaid principal balance of
the Revolving Loans shall bear interest at the applicable rate per annum
provided below:
(a) Revolving Loan. Borrower shall from time to time
designate one or both of the following two options to apply to all or any
portion of the unpaid principal balance of the Revolving Loans: (1) the Base
Rate; or (2) the Eurodollar Rate.
(b) Post Maturity Rate. If all or any portion of the principal
amount of any Revolving Loan made under this Agreement shall not be paid when
due (whether at the stated maturity, by acceleration, or otherwise), such
overdue principal amount, and to the extent permitted by law overdue interest
thereon, shall bear interest at a rate of two percent (2%) (200 basis points)
greater than the interest rate with respect to such Revolving Loan, effective on
the day following the date of nonpayment and continuing until such amounts are
paid in full.
(c) Computation of Interest. All computations of interest with
respect to Eurodollar Rate Borrowings, shall be calculated on the basis of a
year of three hundred sixty (360) days for the actual days elapsed in such
period. All computations of interest with respect to Base Rate Borrowings shall
be calculated on the basis of a year of three hundred sixty (360). In the event
that the Reference Rate announced is, from time to time, changed, adjustment in
the rate of interest payable hereunder on all outstanding Base Rate Borrowings
shall be made as of 12:01 a.m. (California time) on the effective date of the
change in the Reference Rate. Interest shall accrue from the first day of the
making of a Revolving Loan to the date of repayment of such Revolving Loan in
accordance with the provisions of this Agreement; provided, however, if a
Revolving Loan is repaid on the same day on which it is made, then one (1) day's
interest shall be paid on that Revolving Loan. Any and all interest not paid
when due shall thereafter be deemed to be a Revolving Loan made under Section
2.1 and shall bear interest thereafter as provided for in Sections 2.3(a) and
(b).
SECTION 2.4 Notice of Borrowing Requirements.
(a) Each Base Rate Borrowing shall be made on a Business Day
and each Eurodollar Rate Borrowing shall be made on a Eurodollar Business Day.
(b) Each Borrowing shall be made upon telephonic notice given
by a Responsible Officer of Borrower, followed by a Notice of Borrowing in the
form of Exhibit 3, given by telex, telecopy, facsimile, or personal service,
delivered to Bank at both of the addresses set forth in the Notice of Borrowing.
If for a Base Rate Borrowing, Bank shall be given such telephonic notice no
later than 11:00 a.m., California time, one (1) Business Day prior to the day on
which such Borrowing is to be made, and, if for a Eurodollar Rate Borrowing,
Bank shall be given such telephonic notice no later than 11:00 a.m., California
time, three (3) Eurodollar Business Days prior to the day on which such
Borrowing is to be made, and such notice shall state the amount thereof (subject
to the provisions of Section 2.1(a) plus the appropriate Interest Period
thereof.
<PAGE>
(c) Bank shall not incur any liability to Borrower in acting
upon any telephonic notice which Bank believes in good faith to have been given
by a Responsible Officer of Borrower, or for otherwise acting in good faith
under this Section 2.4, and in making any Revolving Loans pursuant to telephonic
notice.
SECTION 2.5 Conversion or Continuation Requirements.
(a) Borrower shall have the option to:
(i) convert, at any time, all or any part of the outstanding Revolving
Loans, in integral multiples of One Hundred Thousand Dollars ($100,000), from a
Revolving Loan bearing interest at one of the interest rate options available
pursuant to Section 2.3(a) to another; or (ii) upon the expiration of any
Interest Period applicable to a Eurodollar Rate Borrowing, to continue all or
any portion of a Eurodollar Rate Borrowing as a Eurodollar Rate Borrowing, with
the succeeding Interest Period(s) of such continued Eurodollar Rate Borrowing
commencing on the expiration date of the Interest Period previously applicable
thereto; provided, however, that a Eurodollar Rate Borrowing may only become a
Base Rate Borrowing or be continued as a Eurodollar Rate Borrowing on the
expiration date of the Interest Period applicable thereto; provided further,
however, that no outstanding Revolving Loan may be continued as, or be converted
into, a Eurodollar Rate Borrowing in the event that, on the earlier of the date
of the delivery of the Notice of Conversion or Continuation or the telephonic
notice in respect thereof, any Default or Event of Default has occurred and is
continuing; provided further, however, that if Borrower fails to deliver the
appropriate Notice of Conversion or Continuation or the telephonic notice in
respect thereof pursuant to the required notice period before the expiration of
the Interest Period of a Eurodollar Rate Borrowing, such Eurodollar Rate
Borrowing shall automatically be converted to a Base Rate Borrowing, upon the
expiration of the applicable Interest Period.
(b) Borrower shall give telephonic notice of any proposed
continuation or conversion pursuant to this Section 2.5 followed by a Notice of
Conversion or Continuation, given by telex, telecopy, facsimile, or personal
service, delivered to Bank at both of the addresses set forth in the Notice of
Conversion or Continuation, in the form of Exhibit 4. Such telephonic notice
shall be given no later than 11:00 a.m., California time, on the Business Day
which is the proposed conversion date (in the case of a conversion to a Base
Rate Borrowing) and no later than 11:00 a.m. California time, one (1) Business
Day in advance of the proposed conversion date (in the case of a conversion of a
Eurodollar Rate Borrowing to a Base Rate Borrowing), three (3) Eurodollar
Business Days in advance of the proposed conversion or continuation date (in the
case of a conversion to, or a continuation of, a Eurodollar Rate Borrowing). If
such Notice of Conversion or Continuation is received by Bank not later than
11:00 a.m., California time, on a Eurodollar Business Day, such day shall be
treated as the first Eurodollar Business Day of the required notice period. In
any other event, such notice will be treated as having been received at the
opening of business of the next Eurodollar Business Day. A Notice of Conversion
or Continuation shall specify: (1) the proposed conversion or continuation date
(which shall be a Business Day or a Eurodollar Business Day, as applicable);
(2) the amount of the Revolving Loan to be converted or continued; (3) the
nature of the proposed conversion or continuation; and (4) in the case of a
conversion to or continuation of a Eurodollar Rate Borrowing, the requested
Interest Period.
<PAGE>
(c) Bank shall incur no liability to Borrower in acting upon
any telephonic notice referred to above which Bank believes in good faith to
have been given by a Responsible Officer on behalf of Borrower or for otherwise
acting in good faith under this Section 2.5 and in conversion or continuation by
Bank in accordance with this Agreement pursuant to any telephonic notice. Any
Notice of Conversion or Continuation (or telephonic notice in respect thereof)
shall be irrevocable and Borrower shall be bound to convert or continue in
accordance therewith.
SECTION 2.6 Eurodollar Costs. Borrower shall reimburse Bank
for any increase in Bank's costs (which shall include, but not be limited to,
taxes, other than taxes imposed on or measured by the overall net income of Bank
(including franchise taxes) fees or charges), or any loss or expense (including,
without limitation, any loss or expense incurred by reason of the liquidation or
re-employment of deposits or other funds acquired by Bank to fund or maintain
outstanding the principal amount of the Revolving Loans) incurred by it directly
or indirectly resulting from the making of any Eurodollar Rate Borrowing due to:
(a) the modification, adoption, or enactment of any law, regulation or treaty or
the interpretation thereof by any governmental or other authority (whether or
not having the force of law) which becomes effective after the date hereof; (b)
the modification or new application of any law, regulation or treaty or the
interpretation thereof by any governmental or other authority (whether or not
having the force of law) which becomes effective after the date hereof; (c)
compliance by Bank with any request or directive (whether or not having the
force of law) of any monetary or fiscal agency or authority which becomes
effective after the date hereof; (d) violations by Borrower of the terms of this
Agreement; or (e) any prepayment of a Eurodollar Rate Borrowing at any time
prior to the end of the applicable Interest Period.
The amount of such costs, losses, or expenses shall be
determined solely by Bank based upon the assumption that Bank funded one hundred
percent (100%) of each Eurodollar Rate Borrowing in the Eurodollar market. In
attributing Bank's general costs relating to its eurocurrency operations to any
transaction under this Agreement or averaging any costs over a period of time,
Bank may use any reasonable attribution or averaging methods which it deems
appropriate and practical. Bank shall notify Borrower of the amount due Bank
pursuant to this Section 2.6 in respect of any Eurodollar Rate Borrowing as soon
as practicable but in any event within forty-five (45) days after the last day
of the Interest Period of such Eurodollar Rate Borrowing, and Borrower shall pay
to Bank the amount due within fifteen (15) days of its receipt of such notice. A
certificate as to the amounts payable and calculations made pursuant to the
foregoing sentence together with whatever detail is reasonably available to Bank
shall be submitted by Bank to Borrower. Such determination shall if not objected
to within ten (10) days be conclusive and binding upon Borrower in the absence
of manifest error. If Bank claims increased costs, loss, or expenses pursuant to
this Section 2.6, then Bank, if requested by Borrower, shall use reasonable
efforts to take such steps that Borrower reasonably request, as wculd eliminate
or reduce the amount of such increased costs, losses, or expenses, so long as
taking such steps would not, in the judgment of Bank, otherwise be
disadvantageous to Bank. Any recovery by Bank or its Lending Office of amounts
previously borne by Borrower pursuant to this Section 2.6 shall be promptly
remitted, without interest (unless Bank received interest on such recovered
amounts), to Borrower by Bank.
<PAGE>
SECTION 2.7 Special Eurodollar Circumstances. In the event
that after the date hereof any change in circumstances or any law, regulation,
treaty or directive, or any change therein or in the interpretation or
application thereof, shall at any time in the reasonable opinion of Bank make it
unlawful or impractical for Bank to fund or maintain a Eurodollar Rate Borrowing
in the eurodollar market or to continue such funding or maintaining, or to
determine or charge interest rates based upon any appropriate Eurodollar Rate,
Bank shall give notice of such circumstances to Borrower and (i) in the case of
any Eurodollar Rate Borrowing which is outstanding, Borrower shall, if requested
by Bank, prepay such Eurodollar Rate Borrowing on or before the date specified
in such request, together with interest accrued thereon, and the date so
specified shall be deemed to be the last day of the Interest Period of that
Eurodollar Rate Borrowing, and concurrent with any such prepayment, Bank shall
make a Base Rate Borrowing to Borrower in the principal amount equal to the
principal amount of the Eurodollar Rate Borrowings so prepaid, and (ii) Bank
shall not be obligated to make any further Eurodollar Rate Borrowings until Bank
determines that it would no longer be unlawful or impractical to do so.
SECTION 2.8 Revolving Note; Statements of Obligations. The
Revolving Loans and Borrower's obligation to repay the same shall be evidenced
by the Revolving Note, this Agreement and the books and records of Bank and all
advances on and payments of principal or interest with respect to the Revolving
Loans shall be evidenced by notations made by Bank on such books and records
showing the date and amount of each such payment of principal or interest. Bank
shall render monthly statements of the Obligations to Borrower, including
statements of all principal and interest owing on the Revolving Loans, and all
Bank's Fees and Bank Expenses owing, and such statements shall be presumed to be
correct and accurate and constitute an account stated between Borrower and Bank
unless, within thirty (30) days after receipt thereof by Borrower, Borrower
delivers to Bank, by registered or certified mail, at Bank's Lending Office,
written objection thereof specifying the error or errors, if any, contained in
any such statement.
<PAGE>
SECTION 2.9 Holidays. Any principal or interest in respect of
the Revolving Loans (other than in respect of a Eurodollar Rate Borrowing) which
would otherwise become due on a day other than a Business Day, shall instead
become due on the next succeeding Business Day and such adjustment shall be
reflected in the computation of interest; provided, however, that in the event
that such due date shall, subsequent to the specification thereof by Bank, for
any reason no longer constitute a Business Day, Bank may change such specified
due date in accordance with this Section 2.9.
SECTION 2.10 Time and Place of Payments.
(a) All payments due hereunder shall be made available to Bank in
immediately available Dollars, not later than 12:00 p.m., Los Angeles
time, on the day of payment, to the following address:
UNION BANK OF CALIFORNIA, N.A.
Investment Banking Note Center #192
1980 Saturn Street
Monterey Park, California 91754
Attention: Maria Suncin
Telefacsimile: (213) 724-6198
Telephone: (213) 720-2672
(b) Without limitation of Bank's rights of setoff granted and acknowledged
hereby by Borrower, Bank shall have the right to charge any account maintained
by Borrower with Bank for the amount of any payment due or past due hereunder.
SECTION 2.11 Fees. Borrower shall pay to Bank a commitment fee
(the "Revolving Commitment Fee") in an amount equal to 0.375% per annum on the
unused commitment amount payable quarterly. The Revolving Commitment Fee shall
begin to accrue on the Closing Date and shall be due and payable on the last day
of each calendar quarter and shall be computed in the same manner as interest on
a Base Rate Borrowing pursuant to Section 2.3(c). Borrower shall also pay a
closing fee of $37,500.
<PAGE>
SECTION 2.12 Mandatory Commitment Reductions. The
RevolvingCommitment shall be reduced annually, commencing September 30, 1996
in accordance with this Section 2.12.
On each Revolving Commitment Reduction Date, the Revolving
Commitment shall be reduced by the amount of the applicable Commitment
Reduction. The reduction shall be accomplished to the extent necessary, by the
payment of a Revolving Commitment Reduction Payment.
Revolving Commitment
Commitment Reduction Date Reduction
September 30, 1996 $2,500,000
September 30, 1997 3,000,000
September 30, 1998 3,000,000
September 30, 1999 3,000,000
September 30, 2000 3,000,000
September 30, 2001 3,000,000
(the Revolving Commitment
shall be reduced to Zero
Dollars ($0) on September 30, 2001)
Borrower shall have the right to voluntarily reduce the Revolving
Commitment at any time in minimum reductions of no less than $500,000.
Any-Voluntary reduction of the Commitment or Revolving
Commitment Reduction Payment shall permanently reduce the Revolving Commitment.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BORROWER
In order to induce Bank to enter into this Agreement, Borrower
makes the following representations and warranties which shall be true and
correct in all material respects as of the Closing Date, and each time a
Revolving Loan is made hereunder, such representations and warranties to survive
the execution and delivery of this Agreement and the making of the Revolving
Loans.
SECTION 3.1 Due Organization. Borrower is a duly organized and
validly existing corporation in good standing under the laws of the State of
Delaware and is duly qualified or licensed and in good standing as a foreign
corporation authorized to do business in all jurisdictions where its failure to
do so would have a material adverse effect on its business. Each of Borrower's
Subsidiaries is a duly organized and validly existing corporation in good
standing under the laws of the state of its incorporation and is duly qualified
or licensed and in good standing as a foreign corporation authorized to do
business in all jurisdictions where its failure to do so would have a material
adverse effect on the business of Borrower and its Subsidiaries taken as a
whole.
<PAGE>
SECTION 3.2 Requisite Power. Each of Borrower and its
Subsidiaries has all requisite corporate power and all domestic governmental
licenses, authorizations, consents, and approvals necessary to own and operate
its properties and to carry on its business as now conducted and as proposed to
be conducted. Borrower has all requisite corporate power to borrow the sums
provided for in this Agreement, to execute and deliver this Agreement, and to
carry out the transactions contemplated hereby and thereby. The execution,
delivery, and performance of this Agreement have been duly authorized by
Borrower's Board of Directors and do not require any consent or approval of the
shareholders of Borrower.
SECTION 3.3 Binding Agreements. This Agreement has been duly
executed and delivered by Borrower, and constitutes the legal, valid, and
binding obligation of Borrower enforceable against Borrower in accordance with
its terms, except as the enforceability thereof may be affected by: (a)
bankruptcy, insolvency, moratorium, or similar laws affecting the enforcement of
creditors' rights generally; and (b) the limitation of certain remedies by
equitable principles of general applicability.
SECTION 3.4 No Conflict. The execution or delivery of and
performance of this Agreement do not and will not violate the articles of
incorporation or by-laws of, or any provision of law or regulation (including,
without limitation, Regulations U and X of the Federal Reserve Board), or any
order, writ, judgment, or decree of any domestic governmental authority, court,
arbitration board or tribunal binding on Borrower, or any of its Subsidiaries or
result in the breach of, constitute a default under, contravene any provisions
of, or result in the creation of any Lien (other than Permitted Liens) upon any
of the property or assets owned by Borrower or any of its Subsidiaries pursuant
to any contractual obligation to which Borrower or any of its Subsidiaries or
any of the properties owned by them are bound.
SECTION 3.5 Litigation. Other than as set forth on Schedule 6,
attached hereto and incorporated herein by this reference, as of the Closing
Date, there is no litigation, investigation, or proceeding in any court or
before any arbitrator or regulatory commission, board, administrative agency, or
other governmental authority pending, or threatened, against or affecting
Borrower or any of Borrower's Subsidiaries or any of their properties (other
than proceedings in the ordinary course of business to the extent they concern
the coverage under surety bonds or other products issued by the Borrower or any
Subsidiary of Borrower) which: (a) may adversely affect the ability of Borrower
or its Subsidiaries to perform their respective obligations under this
Agreement; (b) involves the application for issuance of an injunction, writ,
restraining order, or other order (other than for the payment of money) of any
re materially adverse to Borrower and its Subsidiaries taken as a whole, which
such injunction, writ, restraining, or other order (other than for the payment
of money) been issued and remains in force and effect; or involves litigation or
proceedings as to which there is a reasonable possibility of an adverse
determination that would a material adverse effect upon the business,
operations, condition, financial or otherwise, of Borrower and its subsidiaries
taken as a whole.
<PAGE>
SECTION 3.6 Consents. Other than such as may previously been
obtained, no consent, license, permit, oval, or authorization of, exemption by,
notice to, report or registration, filing or declaration with, any domestic,
governmental authority, or agency is required in section with the execution,
delivery of or performance of payment obligations by Borrower under this
Agreement.
SECTION 3.7 Financial Statements and Condition. The audited
consolidated balance sheet of Borrower dated as of December 31, 1995, and the
related statements of operations, in stockholders' equity and cash flows for the
fiscal ended on such date, certified by KPMG Peat Marwick, a of which has been
delivered to Bank, does fairly present consolidated financial condition of
Borrower and its subsidiaries as of such date and the results of their
operations for the period then ended. All of the aforementioned financial
statements have been prepared in accordance with generally accepted accounting
principles provided on a consistent basis (unless specifically disclosed
otherwise in the notes to such financial statements) of the Closing Date, there
has been no material adverse generally in the financial condition of Borrower
and its subsidiaries taken as a whole, since the preparation of the
aforementioned financial statements.
SECTION 3.8 Use of Loans Proceeds. The proceeds on the
Revolving Loan provided for hereunder shall be used by Borrower to provide
working capital for Borrower, including the making acquisitions except as
limited hereunder.
SECTION 3.9 Regulation U. Borrower, its Subsidiaries are not
engaged principally, in the business of extending, or arranging for the
extension of, credit for the purpose of "purchasing" or "carrying" any margin
stock or securities (within the meaning of Regulations G, T, U or X of the
Federal Reserve Board) as now or from time to time in effect.
SECTION 3.10 Tax Returns. All tax returns required to have
been filed by Borrower and Borrower's Subsidiaries in any jurisdiction have been
filed; all material taxes, assessments, fees and other governmental charges upon
Borrower and Borrower's Subsidiaries or upon any of their respective properties,
incomes, or franchises, which are due and payable have been paid, or are being
contested in good faith or adequate reserves have been provided for payment
thereof.
<PAGE>
SECTION 3.11 Trademarks, Licenses, etc. Borrower and each of
its Subsidiaries that has commenced operations is possessed of all licenses,
trademarks, trademark rights, trade names, trade name rights, copyrights,
permits, franchises and agreements material to the Borrower and its Subsidiaries
taken as whole which are required in order for them to conduct their business
and to operate their properties as now conducted without known conflict with the
rights of others.
SECTION 3.12 Burdensome Aqreements, etc. Borrower and its
Subsidiaries are not, individually or in combination, party to any unusual or
unduly burdensome agreement or undertaking which materially and adversely
affects Borrower's and/or its Subsidiaries' businesses or properties, assets,
operations or condition, financial or otherwise, taken as a whole.
SECTION 3.13 Title and Liens. Except for Permitted Liens, all
of the properties and assets of Borrower and each of its Subsidiaries are free
from all Liens, of any nature whatsoever. Borrower and its Subsidiaries have
good and marketable title to all of the properties and assets reflected in
Borrower's or such Subsidiaries' books and records as being owned by them.
SECTION 3.14 Other Information. Borrower has furnished and/or
may furnish to Bank certain written financial information concerning Borrower
and its Subsidiaries, including written estimates and projections of Borrower's
results of operations and financial position for and as at the end of certain
future periods. There are no statements or conclusions therein which, at the
time provided, are based upon or include misleading information or fail to take
into account material information regarding the matters covered therein.
Borrower has no reason to believe that any of the statements or conclusions
included therein are not true and correct in all material respects at the time
provided. Notwithstanding the foregoing, as to estimates, projections and other
materials relating to future results of operations or financial condition,
Borrower is only representing that such materials have been prepared in good
faith based upon reasonable assumptions and using historical financial
information prepared in accordance with GAAP.
SECTION 3.15 Existing Defaults. As of the Closing Date,
neither Borrower nor any of its Subsidiaries is in material default under any
term of any mortgage, deed of trust, indenture, or any other agreement to which
it is a party or by which it or any of its properties may be bound that is
material to the Borrower and its Subsidiaries taken as a whole. Neither Borrower
nor any of its Subsidiaries is in violation of any law, ordinance, rule or
regulation to which it or any of its properties is subject, the failure to
comply with which would have a material adverse effect on the business or
properties of Borrower and its Subsidiaries taken as a whole.
<PAGE>
SECTION 3.16 Leases. Borrower and each of its Subsidiaries
enjoys peaceful and undisturbed possession under all the leases which are
material to the business of Borrower and its Subsidiaries taken as a whole, to
which it is or they are a party or under which it is or they are operating and
all such leases are valid and subsisting with no material default by Borrower or
its Subsidiaries existing under any of them.
SECTION 3.17 Casualty. As of the Closing Date, neither the
business nor the properties or operations of Borrower or any of its Subsidiaries
are presently affected by any fire, explosion, strike, lockout or other labor
dispute, act of God or other casualty (whether or not covered by insurance),
which materially and adversely affects the businesses, properties or operations
of Borrower and its Subsidiaries taken as a whole.
SECTION 3.18 Investment Company Act. Borrower is not, nor is
any of its Subsidiaries, and immediately after the application by Borrower of
the proceeds of the Loan none of such Persons will be, an "investment company"
required to register under the Investment Company Act of 1940, as amended.
SECTION 3.19 Public Utility Holding Company Act. Borrower is
not, nor is any of its Subsidiaries: (i) a "holding company" nor a "subsidiary
company" or "affiliate" of a "holding company" or of a "subsidiary company" of a
"holding company" within the meaning of the Public Utility Holding Company Act
of 1935, as amended; or (ii) subject to any state law or regulation regulating
public utilities or similar entities.
SECTION 3.20 Disclosure. At the time provided, no
representation or warranty of Borrower contained in this Agreement and no
representation of Borrower or any of its Subsidiaries contained in any other
written document, certificate, or statement furnished to Bank by or on behalf of
Borrower for use in connection with the transactions contemplated by this
Agreement contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein or
therein not misleading. There is no fact known to Borrower which materially
adversely affects or is reasonably likely to materially adversely affect, the
business (present or prospective), operations, property, assets or condition
(financial or otherwise) of Borrower and its Subsidiaries, taken as a whole,
which has not been disclosed herein or in such other documents, certificates,
and statements furnished to Bank on or before the Closing Date hereof for use in
connection with the transactions contemplated hereby.
SECTION 3.21 Location of Chief Executive Office. The chief
executive office of Borrower and its Subsidiaries is located at 6320 Canoga
Avenue, Woodland Hills, California 91365-4500.
<PAGE>
SECTION 3.22 No Default. No Event of Default has occurred.
SECTION 3.23 No Pension Fund Irregularities. With respect to
each Plan, Borrower represents and warrants that, except to the extent that such
is not material to the Borrower and its Subsidiaries taken as a whole:
(a) As of the Closing Date, each Plan is either a valid,
existing and qualified Plan under Sections 401(a) and 501(a) of the IRC or the
Borrower has taken or will promptly take all necessary actions in order to
ensure that each Plan will be valid, existing and qualified under Sections
401(a) and 501(a) of the IRC as soon as is reasonably possible.
(b) Neither Borrower nor any Subsidiary of Borrower nor any
Plan is in violation of or will violate any of the provisions of ERISA or any of
the qualification requirements of Section 401(a) or 501(a) of the IRC.
(c) No Prohibited Transaction or Reportable Event has occurred
or will occur with respect to any Plan, nor has any Plan been the subject of or
will be the subject of a waiver of the minimum funding standard under Section
412 of the IRC.
(d) No notice of intent to terminate a Plan has been filed
under Section 4041 of ERISA, nor has any Plan been terminated under Section 4041
of ERISA.
(e) The PBGC has not instituted proceedings to terminate, or
appoint a trustee to administer, a Plan and no event has occurred or condition
exists which might constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of, a trustee to administer any Plan.
(f) Neither Borrower nor any Subsidiary would be liable for
any amount pursuant to Section 4062, 4063 or 4064 of ERISA if all Plans
terminated as of the most recent valuation dates of such Plans.
SECTION 3.24 Compliance With Law. Borrower and its
Subsidiaries are materially in compliance with all applicable laws, rules,
regulations, including, without limitation, those promulgated by the California
Department of Corporations and the California Department of Insurance.
<PAGE>
ARTICLE IV
CONDITIONS TO LOANS
SECTION 4.1 Conditions Precedent to the Loans. The obligation
of Bank to make the Loans hereunder is subject to the fulfillment, to the
satisfaction of Bank and its counsel, of each of the following conditions on or
before the Closing Date:
(a) Borrower shall have executed and delivered to Bank this
Agreement and the Revolving Note;
(b) Bank shall have received a good standing certificate for
Borrower dated within thirty (30) days of the Closing Date, issued by the
Secretary of State of California and the Secretary of State of Delaware;
(c) Bank shall have received certificates of good standing as
a foreign corporation for Borrower, dated within thirty (30) days of the Closing
Date, issued by the Secretary of State or Department of Insurance, as
appropriate, of the states in which Borrower's failure to be duly qualified or
licensed would have a material adverse effect on the business of Borrower taken
as a whole;
(d) Bank shall have received certified copies of Borrower's
articles of incorporation;
(e) Bank shall have received copies of the by-laws of Borrower
certified by its Secretary or Assistant Secretary;
(f) Bank shall have received signature and incumbency
certificates respecting the officers executing this Agreement;
(g) Bank shall have received an officers' certificate from
Borrower, dated as of the Closing Date, duly executed by the President or a Vice
President and a Secretary or an Assistant Secretary of Borrower, certifying that
no Event of Default has occurred and is continuing;
(h) Bank shall have received a certificate from the Secretary
or an Assistant Secretary of Borrower attesting to the resolution of Borrower's
Board of Directors authorizing the execution and delivery of this Agreement and
authorizing specific officers to execute same;
(i) Bank shall have received full payment of any fees agreed
to, as well as full payment of Bank's reasonable costs and expenses (including
the fees and expenses of Bank's counsel) incurred in connection with the
preparation, negotiation, execution, and delivery of this Agreement;
<PAGE>
(j) the representations and warranties of Borrower set
forth in Article III of this Agreement shall be true and correct;
(k) no Material Adverse Change shall have occurred since March
31, 1996 in the business, operations or financial condition of Borrower and its
Subsidiaries, taken as a whole;
(1) Bank shall have received such other instruments,
agreements and documents as Bank may reasonably request; and
(m) all other documents and legal matters in connection with
the transactions contemplated by this Agreement shall be in form and substance
reasonably satisfactory to Bank and its counsel.
ARTICLE V
AFFIRMATIVE COVENANTS
Borrower covenants that so long as the Loans shall remain
unpaid Borrower shall comply with and fulfill each and all of the following
covenants:
SECTION 5.1 Accounting Records. Borrower shall, and shall
cause each of its Subsidiaries to, maintain adequate books and records in
accordance with generally accepted accounting principles consistently applied,
and permit any representative of Bank, at any time during usual business hours
that do not unreasonably interfere with the conduct of such business, to
inspect, audit and examine such books and inspect any of their properties and
shall furnish Bank with all reasonable information regarding their business or
finances promptly upon Bank's request.
SECTION 5.2 Financial Statements and Reports. Borrower will
furnish or cause to be furnished to Bank:
(a) within sixty (60) days after the close of each of the
first three (3) quarterly accounting periods of Borrower in each fiscal year:
(i) consolidated statements of changes in stockholders' equity and consolidated
statement of cash flows of Borrower and its Subsidiaries for such quarterly
period, each setting forth in comparative form, if applicable, the corresponding
figures for the corresponding periods of the previous fiscal year; (ii)
consolidated statements of operations of Borrower and its Subsidiaries for such
quarterly period, each setting forth in comparative form, if applicable, the
corresponding figures for the corresponding periods of the previous fiscal year;
and (iii) consolidated balance sheets of Borrower and its Subsidiaries as of the
end of such quarterly period, each setting forth in comparative form, if
applicable, the corresponding figures for the most recent fiscal year end, all
in reasonable detail, subject to year-end audit adjustments and certified by the
chief financial officer of Borrower to have been prepared in accordance with
generally accepted accounting principles consistently applied;
<PAGE>
(b) within ninety (90) days after the close of each fiscal
year of Borrower a copy of the annual audit report for such year for Borrower
and its Subsidiaries including therein: (i) consolidated statements of changes
in stockholders' equity and consolidated statements of cash flows of Borrower
and its Subsidiaries for such fiscal year; (ii) consolidated statements of
operations of Borrower and its Subsidiaries for such fiscal year; and (iii)
consolidated balance sheets of Borrower and its Subsidiaries as of the end of
such fiscal year, each setting forth in comparative form, if applicable, the
corresponding figures for the previous year, all in reasonable detail; the
consolidated income statements and balance sheet to be audited by independent,
nationally recognized, certified public accountants, and certified, without a
"going concern" qualification or other qualification or exception or any
qualification arising out of the scope of the audit, by such accountants to have
been prepared in accordance with generally accepted accounting principles,
consistently applied, together with certificates of such accounting firm to
Bank, stating that, in the ordinary and usual course of the regular audit(s) of
the businesses of Borrower and its Subsidiaries which audit(s) was (were)
conducted by such accounting firm in accordance with generally accepted auditing
standards, and, if requested by Bank within 150 days after the close of each
fiscal year of Borrower, Borrower shall, at Borrower's expense, cause such
accounting firm to provide to Bank in a timely manner a certificate of such
accounting firm stating that such accounting firm has obtained no knowledge that
an Event of Default has occurred and is continuing, or if, in the opinion of
such accounting firm, an Event of Default has occurred and is continuing, a
statement as to the nature thereof;
(c) contemporaneously with each quarterly and year-end
financial report required by the foregoing clauses (a) and (b), a certificate in
the form of Exhibit 5 of the chief financial officer of Borrower stating that he
has individually reviewed the provisions of this Agreement, and that a review of
the activities of Borrower and its Subsidiaries during such year or quarterly
period, as the case may be, has been made by or under such individual's
supervision, with a view to determining whether Borrower and its Subsidiaries
have fulfilled all of their obligations under this Agreement, and that Borrower
and its Subsidiaries have observed and performed each undertaking contained in
this Agreement and that no Event of Default has occurred and is continuing, or
if any Event of Default has occurred and is continuing, specifying the nature
thereof;
(d) promptly after sending or making available or filing of
the same, copies of all reports regarding financial condition, proxy statements,
notices, and financial statements that Borrower, and its Subsidiaries sends or
makes available to stockholders and all regular and periodic reports and all
filings and registration statements, including, without limitation, all reports
on Forms 8-K, 10-Q, and 10-K, under the Exchange Act and all final prospectuses
filed pursuant to Rule 424(b) under the Securities Act of 1933, that Borrower or
its Subsidiaries files with the Securities and Exchange Commission or any
successor thereto, or any other securities exchange;
<PAGE>
(e) notice, as soon as possible and in any event within five
(5) days after Borrower has knowledge of (i) the occurrence of an Event of
Default, or (ii) any event of default as defined in any evidence of Debt of
Borrower or its Subsidiaries for borrowed money or under any agreement,
indenture or other instrument under which such Debt has been issued,
irrespective of whether such Debt is accelerated or such default waived. In
either event, Borrower shall also supply Bank with a statement from Borrower's
chief financial officer setting forth the details of such Event of Default or
event of default with respect to other Debt, and the action which Borrower
proposes to take with respect thereto;
(f) within sixty (60) days after the end of each of the first
three (3) quarterly accounting periods of Borrower in each fiscal year and
within ninety (90) days after the end of each of Borrower's fiscal years, a
report in the form of Exhibit 5 in form satisfactory to Bank, indicating
Borrower's financial status as measured by and Borrower's compliance with the
quantitative financial covenants set forth in Sections 5.9, 5.10, 5.11, 5.12,
5.13, 5.14, 5.15 and 5.16 hereof and containing sufficient detail as to explain
the calculation of such financial covenants, which report shall be certified as
true and correct by the chief financial officer of Borrower;
(g) as soon as available, any final written report or letter
to management pertaining to material items in respect of Borrower's or any of
its Subsidiaries' internal control matters submitted to any such Person by its
independent accountants in connection with each annual or interim special audit
of the financial condition of Borrower and its Subsidiaries;
(h) prompt written notice of any condition or event which has
resulted or might reasonably result in (i) a Material Adverse Change in the
financial condition of Borrower or any of its Subsidiaries taken as a whole; or
(ii) a breach of or noncompliance with any term, condition or covenant contained
in this Agreement;
(i) prompt written notice of any claims, proceedings or
disputes against Borrower and/or any of its Subsidiaries (other than proceedings
in the ordinary course of business to the extent they concern the coverage under
surety bonds or other insurance products issued by the Borrower or any
Subsidiary of Borrower) which, if adversely determined, would have a material
adverse effect on the business, properties or condition (financial or otherwise)
of Borrower and its Subsidiaries taken as a whole or any material labor
controversy which could result in a strike against Borrower or any of its
Subsidiaries, or any proposal by any public authority to acquire any of the
material part of the assets or business of Borrower or any of its Subsidiaries;
<PAGE>
(j) as soon as the same is available, copies of all quarterly
and annual statutory statements filed by Borrower or any of its Subsidiaries
with the California Department of Corporations, the California Department of
Insurance or any other state or federal agency, instrumentality or governmental
body;
(k) As soon as practicable, and in any event within 30 days
after the commencement of each fiscal year, a projection for that fiscal year
and the two subsequent fiscal years, including projected consolidated and
consolidating balance sheets and statements of income and cash flow of Borrower
and its Subsidiaries, all in reasonable detail;
(1) within sixty (60) days after the close of each of the
first three (3) quarterly accounting periods of Borrower in each fiscal year and
within ninety (90) days after the close of each fiscal year of Borrower: (i)
unconsolidated statement of cash flows of Borrower for such period (statement of
cash flows to be supplied annually only); (ii) unconsolidated statements of
operations of Borrower for such period; and (iii) unconsolidated balance sheets
as of the end of such period, all in reasonable detail, subject to yearly audit
adjustments and certified by the chief financial officer of Borrower to have
been prepared in accordance with generally accepted accounting principles
consistently applied; and
(m) promptly, such other information in such form as the Bank
may reasonably request concerning the business or condition (financial or
otherwise) of Borrower or its Subsidiaries.
SECTION 5.3 Corporate Existence. Borrower shall, and shall
cause each of its Subsidiaries to preserve and maintain its corporate existence
unless all material and all of its rights, privileges, licenses, permits and
franchises necessary or desirable in the ordinary and usual course of its
business including, without limitation, all materially necessary permits,
authorizations and licenses required by the California Department of
Corporations and California Department of Insurance.
SECTION 5.4 Compliance With Law. Borrower shall, and shall
cause all of its Subsidiaries to in all material respects comply with the
requirements of all applicable laws, rules, regulations and orders of any
governmental agency, including, without limitation, those of the California
Department of Corporations and the California Department of Insurance.
<PAGE>
SECTION 5.5 Insurance. Borrower shall, and shall cause each of
its Subsidiaries to, maintain and keep in force self insurance and insurance of
the types, with such deductibles, including but not limited to fire, public
liability, property damage, and workmen's compensation insurance in amounts
similar to the amounts carried by others in like industries, and Borrower shall,
from time to time, deliver to Bank, as Bank may request, schedules and
certificates setting forth all insurance then in effect.
SECTION 5.6 Properties. Borrower shall, and shall cause each
of its Subsidiaries to, keep in reasonably good repair and condition those
material properties and assets useful or necessary to its business and, from
time to time, to make necessary repairs, renewals, and replacements thereto and
thereof so that such properties and assets shall be fully and efficiently
preserved and maintained.
SECTION 5.7 Taxes and Other Liabilities. Borrower shall, and
shall cause each of its Subsidiaries to, pay and discharge prior to delinquency
all material taxes, assessments, and governmental charges or levies against any
material properties owned by it, and all material claims which if unpaid might
become a Lien, except such as it may in good faith and by appropriate
proceedings diligently contest or as to which a bona fide dispute may arise if
Borrower or the Subsidiary is diligently attempting to resolve such dispute by
appropriate actions; provided, however, that provision must be made by Borrower
or the Subsidiary to the satisfaction of Bank, for prompt payment thereof in the
event that a final and non-appealable determination is made in such proceeding
by the judge or similar official that Borrower or the Subsidiary must satisfy
such obligation.
SECTION 5.8 Tax Returns. At the request of Bank, Borrower
shall furnish Bank with copies of all federal income tax returns which are filed
after the Closing Date by Borrower.
SECTION 5.9 Fixed-Charge Coverage Ratio. The term" Fixed
Charge Coverage Ratio" shall mean, "the ratio of (a) the sum of (i) the amount
of cash, cash equivalents and investments of the borrower, on a non-consolidated
basis, as of the end of such fiscal quarter plus (ii) the estimated interest
expense related to the $10 million Capital Surplus Note over the subsequent four
(4) consecutive quarters plus (iii) the maximum dividends allowable for Amwest
(domicilied in Nebraska) and Condor (domiciled in California), determined on a
combined statutory basis for the four (4) consecutive fiscal quarters ending on
such day, or (2) 10% of the statutory surplus of the most recently ended fiscal
quarter, plus (iv) cash received from stock options exercised for the four (4)
previous consecutive fiscal quarters, plus (v) unused amounts available to be
drawn under this Agreement, to (b) the sum of (i) aggregate payments of
principal and interest on all Debt of the Borrower and its Subsidiaries required
to be paid during the following four (4) consecutive fiscal quarters, plus (ii)
the total amount of common stock dividends to be paid over the next four (4)
consecutive fiscal quarters, plus (iii) the total amount of common share
repurchases over the next four (4) consecutive fiscal quarters, plus (iv) total
capital expenditures incurred by Borrower (inclusive of permitted acquisition
payments made) over the next four (4) consecutive fiscal quarters."
<PAGE>
Borrower shall maintain minimum Fixed Charge Coverage Ratio of 1.1:1.0.
SECTION 5.10 Section 5.10 is intentionally deleted in
this Restated Revolving Credit Agreement.
SECTION 5.11 Tangible Net Worth. Borrower shall maintain a
minimum of 90% of the Tangible Net Worth as reported in its March 31, 1996
financial statement. The minimum Tangible Net Worth shall increase each fiscal
year thereafter by 50% of Borrower's net income. Minimum Tangible Net Worth
shall also be increased each fiscal year by the dollar amount of any initial
public offering of securities.
SECTION 5.12 Net Profit. On a consolidated GAAP basis,
Borrower and its Subsidiaries shall earn a Net Profit for each fiscal year
during the term of this Agreement.
SECTION 5.13 Policyholders' Surplus. On a consolidated
statutory basis, ASIC and its Subsidiaries shall maintain Capital Surplus of at
least 90% of the Capital Surplus as reported as of March 31, 1996.
SECTION 5.14 Operating Leverage Ratio. On a consolidated
statutory basis, ASIC and its Subsidiaries shall not permit the Operating
Leverage Ratio to exceed 3.0:1.0 as of the last day of each fiscal quarter
during the term of this Agreement.
SECTION 5.15 A.M. Best Rating. ASIC shall at all times d
uring the term of this Agreement maintain an A.M. Best rating of A- or better.
Should A.M. Best cease to exist then any other acknowledged
rating agency shall be substituted with an equivalent rating being required.
SECTION 5.16 Investment Portfolio Ouality. On a consolidated
basis, ASIC and its Subsidiaries, shall at all times during the term of this
Agreement maintain an average fixed income portfolio rating of A as determined
by the Borrower's investment advisors who shall use in their calculation the
individual bond ratings supplied by reputable rating agencies.
SECTION 5.17 Pension Plan Funding. Borrower shall furnish to
Bank:
<PAGE>
(a) Promptly and in any event within thirty (30) days after
the occurrence of a Reportable Event with respect to a Plan, a copy of any
materials required to be filed with the PBGC with respect to such Reportable
Event (whether or not Borrower or a Subsidiary of Borrower is required to
provide the PBGC with notice of such Reportable Event within thirty (30) days of
its occurrence or at some later time) and a statement of the chief financial
officer of Borrower setting forth the details concerning such Reportable Event
and the action which Borrower or the Subsidiary of Borrower proposes to take
with respect thereto;
(b) At least ten (10) days prior to the filing of a notice of
intent to terminate by an administrator of a Plan, a copy of such notice;
(c) Promptly and in no event more than ten (10) days after
receipt thereof by Borrower or any Subsidiary of Borrower, a copy of a notice
received by Borrower or any Subsidiary of Borrower or any administrator of any
Plan that the PBGC has instituted proceedings to terminate any Plan or to
appoint a trustee to administer the Plan;
(d) Promptly and in no event more than ten (10) days after the
filing thereof with the Internal Revenue Service, copies of each annual report
for each Plan and the actuarial statements and certified financing statements
for the Plan filed therewith;
(e) Promptly and in any event within three (3) days after
Borrower knows or has reason to know of any event or condition which might
constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of, a trustee to administer, any Plan, a statement of the chief
financial officer of Borrower describing such event or condition; and
(f) Promptly and in no event more than ten (10) days after
receipt thereof by Borrower or any Subsidiary of Borrower, each notice received
by.Borrower or any Subsidiary of Borrower concerning the imposition of any
withdrawal liability under Section 4202 of ERISA.
SECTION 5.18 Reinsurance Contract. Borrower shall maintain in
full force and effect participation reinsurance contracts with major reinsurers,
similar in substance to those reinsurance contracts in place on the date of this
Agreement.
SECTION 5.19 Storage and Protection of Data. Borrower shall,
and shall cause each of its Subsidiaries to, take all actions customary in the
insurance business (including, but not limited to, data dumps and off-site data
records and storage periodically updated) to adequately maintain, store, secure
and protect all data, records and files, the loss of which would materially
adversely affect the operations and business of Borrower and/or any of its
Subsidiaries.
<PAGE>
ARTICLE VI
NEGATIVE COVENANTS
Borrower covenants that so long as any of the Loans shall
remain unpaid Borrower shall comply with and fulfill each and all of the
following covenants:
SECTION 6.1 Mergers, Consolidations. Borrower shall not, nor
shall it permit any of its Subsidiaries, to change its or their name without
notification to Bank, materially change the nature of its or their business,
sell (whether in any one transaction or a series of transactions) all or
substantially all of the assets of the Borrower and its Subsidiaries on a
consolidated basis, enter into any merger, consolidation, reorganization or
recapitalization, or reclassify its capital stock. Notwithstanding the first
sentence of this Section 6.1, nothing contained in this Agreement shall be
construed to prevent any merger or consolidation which occurs solely between
Subsidiaries of Borrower or any reorganization, recapitalization or
reclassification of the capital stock of any Subsidiary which occurs in
connection therewith.
SECTION 6.2 Sale of Assets. Notwithstanding anything to the
contrary contained in this Agreement, except in the ordinary course of business,
Borrower will not, and will not permit any of its Subsidiaries to sell, assign,
transfer, convey or otherwise dispose of their assets, whether now owned or
hereafter acquired, including the stock of either Subsidiary of Borrower.
SECTION 6.3 Liens. Borrower shall not, nor shall it permit any
Subsidiary to, mortgage, pledge, grant, or permit to exist any Lien upon or with
respect to any of its properties or assets of any kind, including, without
limitation, the stock of any of its Subsidiaries, now owned or hereafter
acquired, or any income or profits therefrom, except: (i) the Liens reflected on
Schedule 2, attached hereto and incorporated herein by this reference; (ii)
warehouseman's, mechanic's, landlord's, tax, assessments, other governmental
charges and other like liens arising in the ordinary course of business securing
obligations that are not incurred in connection with the obtaining of any
advance or credit and which are either not overdue or are being contested and
provided for in accordance with Section 5.7 hereof; (iii) Liens (other than any
Lien imposed by ERISA) incurred or deposits made in the ordinary course of
business in connection with surety and appeal bonds, leases, government
contracts, performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money); (iv) first trust
deed mortgages securing conforming real estate loans requiring substantially
equal monthly payments amortizing over a period of no less than fifteen (15)
<PAGE>
years; (v) purchase money security interests in personal property; (vi)
easements, rights of way, restrictions, and other similar charges or
encumbrances on real property not interfering with the ordinary conduct of the
business of Borrower or any of its Subsidiaries; (vii) judgment liens in
existence less than thirty (30) days after the entry thereof or with respect to
which execution has been stayed or the payment of which is covered in full by
insurance (subject to customary deductibles); and (viii) banker's liens arising
in the ordinary and usual course of Borrower's or its Subsidiaries' business
(ix) Liens existing on property of any Person at the time such Person becomes a
Subsidiary and not incurred in contemplation thereof; (x) Liens existing on
property at the time of the acquisition thereof and not incurred in
contemplation thereof, including without limitation Liens on property acquired
by foreclosure on junior mortgages or deeds of trust; (xi) renewals, extensions
or other modifications of the liens under clauses (i), (ix) and (x), provided
the principal amount of the obligations secured thereby does not exceed the
amount set forth on Schedule 2 (in the case of clause (i)) or the amount
outstanding at the time such Person becomes a Subsidiary or of such acquisition
(in the case of clauses (ix) and (x), respectively, as applicable; (xii) Liens
securing Debt in an amount not to exceed $500,000 at any time outstanding and
permitted by Section 6.8; and (xiii) Liens incidental to the conduct of the
business of the Borrower and its Subsidiaries or the ownership of their property
that were not incurred in connection with borrowed money and that, in the
aggregate, do not materially detract from the value of the property or impair
the use thereof and that, in any event, do not secure obligations aggregating in
excess of $500,000 (the items described in clauses (i) through (xiii) of this
Section 6.3 are collectively referred to herein as the "Permitted Liens").
SECTION 6.4 Contingent Obiigations. Borrower will not, and
will not permit any of its Subsidiaries to, directly or indirectly, create or
become or be liable with respect to any material Contingent Obligation except
that Borrower and its Subsidiaries may remain liable for any preexisting
Contingent Obligation set forth on Schedule 3, attached hereto and incorporated
herein by this reference and any amendments, renewals, extensions or other
modifications thereof provided that the amount thereof does not exceed the
amount set forth on such Schedule. Notwithstanding anything contained in this
Section 6.4, Borrower and its Subsidiaries may amend and/or replace reinsurance
agreements in the ordinary course of business.
SECTION 6.5 Conduct of Business. Borrower will not, and
Borrower will not permit its Subsidiaries to, engage in any business other than
the businesses in which Borrower and its Subsidiaries are engaged as of the date
hereof and businesses reasonably related thereto.
<PAGE>
SECTION 6.6 Transactions with Shareholders. Borrower
will not, and will not
permit any of its Subsidiaries to, directly or indirectly, enter into or permit
to exist any transaction (including, without limitation, the purchase, sale,
lease or exchange of any property or the rendering of any service) with any
holder of five percent (5%) or more of any class of equity securities of
Borrower or with any Subsidiaries or of any such holder, on terms that are
materially less favorable to Borrower or such Subsidiary than those which might
be obtained at the time from Persons who are not such a holder or Subsidiary or,
if such transaction is not one in which terms could be obtained from such other
Person, on terms that are not negotiated in good faith on an arm's length basis.
The foregoing shall not prohibit (i) any transaction between the Borrower and
its Subsidiaries or between its Subsidiaries, (ii) the payment of directors'
fees, and (iii) subject to Section 6.8, Investments by the Borrower or any
Subsidiary thereof in a Subsidiary of the Borrower or another such Subsidiary.
SECTION 6.7 Restrictive Agreements. Borrower will not, and
will not permit any of its Subsidiaries to, enter into any agreement which
restricts the ability of such Subsidiary to make payments to Borrower by way of
dividends, advances, or reimbursements or otherwise, other than as specifically
authorized, permitted or required pursuant to this Agreement or as required by
applicable insurance laws, insurance regulators or other governmental authority.
SECTION 6.8 Debt. Borrower shall not, nor shall it permit any
of its Subsidiaries to, incur, create, assume, or permit to exist any Debt,
excluding only the following: the Revolving Loans; loans or advances made to its
Subsidiaries; travel, relocation and entertainment advances to employees; loans
to employees not exceeding Twenty Thousand Dollars ($20,000) each or One Hundred
Thousand Dollars ($100,000) in the aggregate; conforming real estate loans
secured by real property, provided such real estate loans are secured by a first
trust deed mortgage requiring substantially equal monthly payments amortizing
over a period no less than fifteen (15) years; purchase money Debt; and the Debt
described on Schedule 4, attached hereto and incorporated herein by this
reference and renewals, refinancings, extensions or other modifications thereof
provided the principal amount thereof does not exceed the amount set forth on
such Schedule; Debt of any Person existing at the time such Person becomes a
Subsidiary and not incurred in contemplation thereof; Debt assumed in connection
with the acquisition of property, including without limitation Debt secured by
property acquired by foreclosure on junior mortgages or deeds of trust;
Contingent Obligations not prohibited by Section 6.4; performance, surety and
other bonds issued by the Borrower and its Subsidiaries in the ordinary course
of their business; and secured or unsecured Debt in an amount not to exceed
$500,000 at any time outstanding.
SECTION 6.9 Dividends. Dividends shall be permitted during any
given fiscal year in an amount set forth below opposite the applicable Tangible
Net Worth of Borrower as of the end of the immediately preceding fiscal year, as
reported in the financial statements for such fiscal year delivered to the Bank,
if at the time of the payment of the dividend there has not occurred or is not
continuing an Event of Default.
<PAGE>
Maximum Annual Consolidated
Dividend _____ Tangible Net Worth_______
$1,700,000 x greater than or = 48,700,000
1,820,000 x greater than or = 54,500,000
1,975,000 x greater than or = 61,400,000
2,125,000 x greater than or = 69,500,000
2,250,000 x greater than or = 71,500,000
SECTION 6.10 Leases. Borrower shall not, nor shall it permit
any of its Subsidiaries to incur obligations under leases other than in the
ordinary and usual course of their business consistent with past practices.
SECTION 6.11 Stock. Borrower may redeem, purchase, retire or
otherwise acquire any shares of any class of capital stock of Borrower, but any
such acquisitions shall reduce the annual payment limitation in Section 6.21,
except that transactions under Borrowers employee stock option plans shall not
be counted towards the annual limitation.
SECTION 6.12 Prepayment and Repayment of Debt. Borrower shall
not, nor shall it permit any of its Subsidiaries to, make any optional
prepayment with respect to any Debt for borrowed money, or any Debt secured by
any Permitted Lien, or enter into or modify any Debt agreement in a way which
would be materially adverse to the interests of Bank or as a result of which the
terms of payment of any of the foregoing Debt are accelerated except, that: (a)
Borrower shall be entitled to the benefit of its rights respecting the Revolving
Loans provided for in this Agreement; and (b) Subsidiaries of Borrower may
prepay Debt owed to Borrower.
SECTION 6.13 Sale-Leaseback$. Borrower shall not, nor shall it
permit any of its Subsidiaries to, enter into any sale-leaseback transaction.
SECTION 6.14 Misrepresentations. Borrower shall not, nor shall
it permit any of its Subsidiaries to, furnish Bank any certificate or other
document that contains any untrue statement of material fact or that fails to
state a material fact necessary to make it not misleading in light of the
circumstances under which it was furnished.
SECTION 6.15 Partnerships. Borrower and its Subsidiaries may
become a general or limited partner in any partnership or a joint venturer in
any joint venture, but if a monetary investment, other than an investment in the
ordinary course of business, is required then such investment shall reduce the
annual limitation in Section 6.21. Investments must be in full compliance with
Borrower's internal investment guideline parameters as authorized by Borrower's
Board of Directors. Set forth on Schedule 5, attached hereto and incorporated
herein by this reference are current partnership or joint venture investments.
<PAGE>
SECTION 6.16 Subsidiaries Debt and Liens. Borrower shall not,
except for Permitted Liens, directly or indirectly, sell, assign, pledge or
otherwise transfer any Debt of or claim against a Subsidiary and will not permit
a Subsidiary to sell, assign, pledge or otherwise transfer any Debt or claim
against Borrower or any other Subsidiary.
SECTION 6.17 Changes in Location of Chief Executive Office.
Borrower shall not, nor shall it permit any of its Subsidiaries to, relocate
their respective chief executive offices without first giving Bank thirty (30)
days prior written notice of any proposed relocation.
SECTION 6.18 Loss Reserves. Borrower shall not sell any of its
loss reserves without prior written approval of Bank.
SECTION 6.19 Surplus Note. Borrower shall not during the term
of this Agreement, directly or indirectly sell, assign, transfer, discount,
pledge, encumber, convey, grant an option on or otherwise dispose of that
certain Surplus Note held by Borrower.
SECTION 6.20 Capitalized Expenditures. Borrower, on a
consolidated basis, shall not expend more than One Million Dollars ($1,000,000)
per fiscal year on Capitalized Expenditures (other than expenditures subject to
Section 6.21). To the extent that less than One Million Dollars ($1,000,000) is
used, the unused portion may be added to the limitation applicable to the
immediately following fiscal year but may not be added to any year thereafter.
The amount carried over shall be applied first.
SECTION 6.21 Acquisitions. Borrower, on a consolidated basis,
shall not make any acquisitions of stock representing a controlling interest or
all or substantially all assets of (or a division of) any entities that are not
in the same or similar kind of business as Borrower, nor shall any acquisitions
in any fiscal year require annual payments of more than Two Million Dollars
($2,000,000) in any such fiscal year; provided however that aggregate annual
amount of permitted acquistions hereunder shall be reduced by the Capital
Expenditures used by Borrower under Section 6.20 above. To the extent that less
than the aggregate annual amount of permitted acquisitions less Capital
Expenditures is used, the unused portion may be added to the limitation
applicable to the immediately following fiscal year but may not be added to any
year thereafter. The amount carried over shall be applied first.
<PAGE>
ARTICLE VII
EVENTS OF DEFAULT
SECTION 7.1 Events of Default. The occurrence of any of the
following events, acts, or occurrences shall constitute an event of default (an
"Event of Default") hereunder:
(a) Borrower shall fail to pay within ten (10) days of the
date when due any amount owing hereunder in respect of principal, and/or
interest on the Loans or any other amounts payable in connection herewith;
(b) Borrower shall default in any respect in the performance
or observance of any term, covenant, condition or agreement on its part to be
performed or observed under Sections 5.9, 5.10, 5.11, 5.12, 5.13, 5.14, 5.15
and/or 5.16 hereof; or
(c) Borrower or any of its Subsidiaries shall fail to observe
or perform any other term, covenant, condition, agreement, or obligation to be
observed or performed by it under this Agreement and such failure shall not be
cured or remedied within thirty (30) days following notice by Bank to Borrower
of such occurrence; or
(d) Borrower or any of its Subsidiaries shall default (as
principal or guarantor or other surety) in the payment when due (subject to any
applicable notice or grace period), whether at stated maturity or otherwise in
an amount in excess of $1,500,000, of any monetary obligation (howsoever
designated) on any Debt, whether such indebtedness now exists or shall hereafter
be created and such default shall not be cured and remedied within thirty (30)
days of the date of occurrence of such default; or
(e) An event of default (with respect to the Borrower or any
of its Subsidiaries) as defined in any mortgage, indenture or instrument under
which there may be issued, or by which there may be secured or evidenced, any
Debt of, or guaranteed by, Borrower or any of its Subsidiaries, whether such
Debt now exists or shall hereafter be created, shall occur and shall permit such
Debt to become due and payable prior to its stated maturity or due date, and
such event of default shall not be cured and remedied within thirty (30) days of
the date of occurrence of such event of default; or
(f) Any financial statement, representation, warranty or
certification made or furnished by Borrower or any of its Subsidiaries in any
statement, document, letter or other writing or instrument furnished or
delivered to Bank pursuant to or in connection with this Agreement, or as an
inducement to Bank to enter into this Agreement, shall at any time prove to have
been materially false, incorrect, or incomplete when made or effective or
reaffirmed, as the case may be; or
<PAGE>
(g) Borrower or any of its Subsidiaries shall suffer a final
judgment or judgments for payment of money aggregating in excess of Two Hundred
Fifty Thousand Dollars ($250,000) (net of insurance) and shall not discharge the
same within a period of thirty (30) days unless, pending further proceedings,
execution has not been commenced or if commenced, has been effectively stayed or
bonded against;
(h) A judgment creditor of Borrower or any of its Subsidiaries
shall obtain possession of any material portion of the properties or assets of
Borrower or any of its Subsidiaries by any means, including, without limitation,
levy, distraint, replevin or self-help; or
(i) Borrower or any of its Subsidiaries shall institute a
voluntary case seeking liquidation or reorganization under Chapter 7 or Chapter
11, respectively, of the Bankruptcy Code; or Borrower, or any of its
Subsidiaries shall file a petition, answer or complaint or shall otherwise
institute any similar proceeding under any other applicable federal or state
law, or shall consent thereto; or Borrower, or any of its Subsidiaries shall
apply for, or by consent or acquiescence there shall be an appointment of, a
receiver, liquidator, sequestrator, trustee or other officer with similar
powers, of Borrower or any such Subsidiary; or any conservatorship or similar
proceeding is commenced by or brought on behalf of the California Department of
Insurance with respect to any insurance Subsidiary of Borrower; or Borrower or
any of its Subsidiaries shall make a general assignment for the benefit of
creditors; or if an involuntary case shall be commenced seeking the liquidation
or reorganization of Borrower or any of its Subsidiaries under Chapter 7 or
Chapter 11, respectively, of the United States Bankruptcy Code or any similar
proceeding shall be commenced against Borrower or any such Subsidiary under any
other applicable federal or state law and (a) Borrower or any of its
Subsidiaries consents to the institution of the involuntary case, (b) the
petition commencing the involuntary case is not timely controverted, (c) the
petition commencing the involuntary case is not dismissed within sixty (60) days
of its filing, (d) an interim trustee is appointed to take possession of all or
a portion of the property, and/or to operate all or any portion of the business
of Borrower or any of its Subsidiaries, or (e) an order for relief shall have
been issued or entered therein; or a decree or order of a court having
jurisdiction in the premises for the appointment of a receiver, liquidator,
sequestrator, trustee or other officer having similar powers of Borrower or any
of its Subsidiaries or of all or a portion of its property, shall have been
entered and, within forty-five (45) days from the date of entry, is not vacated,
discharged, or bonded against; or any other similar relief shall be granted
against Borrower, or any of its Subsidiaries under any applicable federal or
state law and, within forty-five (45) days from the date of entry, is not
vacated, discharged, or bonded against; or
<PAGE>
(j) Borrower or any of its Subsidiaries shall generally fail
to pay, or admit in writing its inability to pay, its debts as they become due.
SECTION 7.2 Remedies. Upon the occurrence of an Event of
Default:
(a) If such Event of Default arises under clause (i) of
Section 7.1 hereof, then all principal, accrued interest, and any other sums
then owing by Borrower under and in connection herewith shall become and be
immediately due and payable and Bank's obligation to make advances on the
Revolving Loan (and Bank's obligation to continue/convert any Loan pursuant to
Section 2.5 hereinabove) shall cease, without presentment, demand, protest or
notice of any kind all of which are hereby expressly waived by the Borrower; and
(b) In the case of any other Event of Default, Bank's
obligation to make advances on the Revolving Loan (and Bank's obligation to
continue/convert any Loan pursuant to Section 2.5 hereinabove) shall cease and
Bank may declare all principal, interest, and other sums then owing by Borrower
under and in connection herewith to be forthwith due and payable, whereupon all
such sums shall become and be immediately due and payable without presentment,
demand, protest or notice of any kind, all of which are hereby expressly waived
by Borrower. Promptly following the making of any such declaration, Bank shall
give notice thereof to Borrower but failure to do so or any delay in so doing
shall not impair the effect of such declaration; and
(c) In addition to any acceleration of the Debt owing to Bank
by Borrower hereunder as provided for in clauses (a) and (b) above, Bank shall
have all rights and remedies available at law, in equity, and otherwise.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 Waivers, Modifications in Writing. The remedies
provided for herein are cumulative and are not exclusive of any remedies that
may be available to Bank at law, in equity, or otherwise. No amendment,
modification, supplement, termination, or waiver of or to any provision of this
Agreement, nor consent to any departure by Borrower therefrom, shall be
effective unless the same shall be in writing and signed by Bank. Any waiver of
any provision of this Agreement, and any consent to any departure by Borrower
from the terms of any provisions therefrom, shall be effective only in the
specific instance and for the specific purpose for which given. No notice to or
demand on Borrower in any case shall entitle Borrower to any other or further
notice or demand in similar or other circumstances.
<PAGE>
SECTION 8.2 Failure or Delay. No failure or delay on the part
of Bank in the exercise of any power, right, remedy or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right, remedy, or privilege preclude other or
further exercise of any other power, right, remedy, or privilege.
SECTION 8.3 Notices, etc. All notices, demands, instructions,
and other communications required or permitted to be given to or made upon any
party hereto shall be in writing and (except for financial statements and other
related informational documents to be furnished pursuant hereto which may be
sent by first-class mail, postage prepaid) shall be personally delivered or sent
by registered or certified mail, postage prepaid, return receipt requested, or
by prepaid telex, TWX, telecopy or telegram (with messenger delivery specified)
and shall be deemed to be given for purposes of this Agreement on the day that
such writing is received by the intended recipient thereof. Unless otherwise
specified in a notice sent or delivered in accordance with the foregoing
provisions of this Section 8.3, notices, demands, instructions and other
communications in writing shall be given to or made upon the respective parties
hereto at their respective addresses (or to their respective telex, TWX or
telecopier numbers) as follows:
If to Bank: Union Bank of California, N.A.
550 South Hope Street, 3rd Floor
Los Angeles, California 90071
Attn: James R. Fothergill, V.P.
With a Copy to: Union Bank of California, N.A.
445 South Figueroa Street, 8th Floor
Los Angeles, California 90071
Attn: Legal Department
If to Borrower: Amwest Insurance Group, Inc.
6320 Canoga Ave.
Woodland Hills, California 91365-4500
Attn: Steven R. Kay, Sr. V.P.
<PAGE>
SECTION 8.4 Costs and Expenses. Borrower agrees to pay: (a)
all reasonable out-of-pocket costs and expenses of Bank incurred or expended in
connection with the negotiation, preparation, printing, reproduction, execution,
and delivery of this Agreement, any amendments or modifications of (or
supplements to) any of the foregoing and any and all other agreements or
documents furnished in connection with the execution and delivery of this
Agreement, including the reasonable fees and out-of-pocket expenses of
Buchalter, Nemer, Fields & Younger, a Professional Corporation, special counsel
to Bank, or any other counsel to Bank; (b) all costs and expenses (including,
without limitation, all attorneys' fees and expenses), if any, incurred or
expended by Bank after an Event of Default in connection with the enforcement of
this Agreement or any other agreements or documents furnished pursuant hereto or
in connection herewith or therewith, whether or not suit is brought with respect
thereto; and (c) all stamp, transfer, and other taxes payable or determined to
be payable in connection with the execution and delivery of this Agreement.
SECTION 8.5 Sale of Participation. Bank shall be entitled to
sell participation interests in the Loans to Persons not party to this Agreement
without being required to so advise Borrower so long as Bank is entitled to
represent the interests of such Persons. Except as otherwise expressly agreed in
writing by Borrower, Bank shall not, by reason of the sale of any participation
interest, be relieved of any of its obligations hereunder.
SECTION 8.6 Headings. Article and Section headings used in
this Agreement are for convenience of reference only and shall not affect the
construction of this Agreement.
SECTION 8.7 Execution in Counterparts. This Agreement may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which counterparts, when so executed and delivered, shall
be deemed to be an original and all of which counterparts, taken together, shall
constitute but one and the same Agreement.
SECTION 8.8 Binding Effect; Assignment. This Agreement shall
be binding upon, and inure to the benefit of, Borrower and Bank, and their
respective successors and assigns; provided, however, that Borrower may not
assign its rights hereunder or in connection herewith or any interest herein
(voluntarily, by operation of law, or otherwise) without the prior written
consent of Bank. This Agreement shall not be construed so as to confer any right
or benefit upon any Person other than the parties to this Agreement and each of
their respective successors and assigns.
SECTION 8.9 Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
<PAGE>
SECTION 8.10 Publicity. Except for filings with regulatory
bodies in the ordinary course of business, any publicity release, advertisement,
filing, public statement, or announcement made by or at the behest of Borrower
or any Subsidiary of Borrower regarding this Agreement or the financing provided
hereunder which makes reference to Bank or describes the financing provided by
Bank, shall be first reviewed by Bank and must be reasonably satisfactory to
Bank.
SECTION 8.11 Complete Agreement. This Agreement, together with
the exhibits to this Agreement, is intended by the parties as a final expression
of their agreement and is intended as a complete statement of the terms and
conditions of their agreement.
SECTION 8.12 Governing Law and Venue. This Agreement shall be
deemed to have been made in the State of California and the validity of this
Agreement, the construction, interpretation, and enforcement thereof, and the
rights of the parties thereto shall be determined under, governed by, and
construed in accordance with the internal laws of the State of California,
without regard to principles of conflicts of law. The parties agree that all
arbitrations brought pursuant to Section 8.13 hereof shall be held only in the
County of Los Angeles, State of California or, at the sole option of Bank, in
any other venue in which Bank, shall initiate such arbitration.
SECTION 8.13 Dispute Resolution.
(a) Mandatory Arbitration. Any controversy or claim between or
among the parties arising out of or relating to (i) this Agreement, any Credit
Documents, or any other document, instrument, or agreement executed in
conjunction herewith (collectively, the "Subject Documents"), (ii) any
negotiations, correspondence, or communications, whether or not incorporated or
integrated into the Subject Documents, relating to the Subject Documents or any
indebtedness evidenced thereby or (iii) the administration or management of the
Revolving Note and the other Subject Documents evidenced thereby, and with
respect to (i),
(ii) and (iii) also including any such controversy or claim based on or
arising out of an alleged tort, shall be determined by arbitration in accordance
with Title 9 of the U.S. Code and the Commercial Arbitration Rules of the
American Arbitration Association (the "AAA"); provided, however, that unless
Bank and all parties to the Subject Documents consent to such submission, this
Section shall not apply to the extent that (i) such claims or controversy
involves enforcement of any Subject Documents with respect to obligations which
are incurred primarily for personal, family, or household use or (ii) any
Subject Documents or any other obligations to Bank described in or covered by
any of the Subject Documents are secured by real property. All statutes of
limitations and waivers which would otherwise be applicable shall apply to any
arbitration proceeding under this subsection (a).
Judgment upon the award rendered may be entered in any court having
jurisdiction.
<PAGE>
(b) Judicial Reference. If any such claim or controversy is
not determined by arbitration as provided and limited in subsection (a) but
becomes the subject of a judicial action, then all matters of fact and law in
such judicial action shall at the election of any party hereto be referred to a
referee in accordance with California Code of civil Procedure Sections 638 et
seq. for determination in accordance with applicable law. If such an election is
made, then the parties shall designate to the court a referee or referees
selected under the auspices of the AAA in the same manner as arbitrators are
selected in AAA sponsored proceedings. The presiding referee of the panel, or
the referee if there is a single referee, shall be an experienced attorney
actively engaged in the practice of commercial finance law or a retired judge.
Judgment upon the award rendered by such referee or referees shall be entered in
the court in which such proceeding was commenced in accordance with California
Code of Civil Procedure Sections 644 and 645. IN CONNECTION WITH ANY SUCH
JUDICIAL REFERENCE, THE PARTIES HERETO HEREBY EXPRESSLY, DELIBERATELY, AND
INTENTIONALLY WAIVE ANY RIGHT THEY MAY OTHERWISE HAVE TO TRIAL BY JURY OF SUCH
CLAIM OR CONTROVERSY, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, UNLESS
SUCH CLAIM OR CONTROVERSY INVOLVES THE ENFORCEMENT OF ANY SUBJECT DOCUMENT WITH
RESPECT TO OBLIGATIONS WHICH ARE INCURRED PRIMARILY FOR PERSONAL, FAMILY, OR
HOUSEHOLD USE.
(c) Provisional Remedies, Self Help and Foreclosure. No
provision of, or the exercise of any rights under, subsection (a) shall limit
the right of any party to exercise self-help remedies such as setoff, to
foreclose against any real or personal property collateral, or to obtain
provisional or ancillary remedies, including but not limited to, injunctive
relief or the appointment of a receiver from a court having jurisdiction before,
during, or after the pendency of any arbitration. At Bank's option, foreclosure
under a deed of trust or mortgage may be accomplished either by exercise of
power of sale under the deed of trust or mortgage or by judicial foreclosure.
The institution and maintenance of an action for judicial relief or pursuit of
provisional or ancillary remedies or exercise of self-help remedies shall not
constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration. The parties agree that the
submission of any controversy or claim to arbitration under subsection (a), or
to a referee under subsection (b); the granting or entry of any award in
connection with such submission; or, the exercise of any provisional or
self-help remedy, including foreclosure of collateral, under this subparagraph 3
shall not be deemed to be an "action" under Section 726 of the California Code
of Civil Procedure or any other similar law or regulation.
<PAGE>
(d) Miscellaneous. In connection with any claim or controversy
governed by this Section, the party whom the arbitrator or referee determines is
the prevailing party shall be entitled to have the other party or parties pay
the expenses of the prevailing party, but subject to the award of the arbitrator
or referee, each party shall pay an equal share of the arbitrator's or referee's
fees. In this regard the arbitrator or referee shall have the power to award
recovery to such prevailing party of all costs and fees (including attorneys'
fees and a reasonable allocation for the costs of in-house counsel and staff),
administrative fees, arbitrator's or referee's fees, and court costs, all as
determined by the arbitrator or referee, as the case may be. Any decision or
award by the arbitrator shall be in writing and include a brief summary of the
supporting evidence and applicable law. Any arbitration hereunder shall be
conducted in Los Angeles, California. The provisions of this Section shall
survive any termination, amendment or expiration of the Subject Documents, or
any of them, unless Bank and all other parties thereto otherwise expressly agree
in writing. In any arbitration or other proceeding held pursuant to this
Section, all oral and written communications between or among the parties hereto
[remainder of this page intentionally left blank]
<PAGE>
shall be deemed privileged for all purposes as if the parties had proceeded
judicially.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.
UNION BANK OF CALIFORNIA, N.A.
By:
Title:
AMWEST INSURANCE GROUP, INC.
a Delaware corporation
By:
Title:
<PAGE>
REVOLVING NOTE
$17,500,000 Los Angeles,
California
July 10, 1996
FOR VALUE RECEIVED, AMWEST INSURANCE GROUP, INC., a Delaware
corporation ("Borrower") hereby promises to pay to the order of UNION BANK OF
CALIFORNIA, N. A., a California banking corporation ("Bank"), the principal sum
of Seventeen Million Five Hundred Thousand Dollars ($17,500,000), or such lesser
sum as shall equal the aggregate outstanding principal amount of the Revolving
Loans made by Bank to Borrower pursuant to the Restated Revolving Credit
Agreement referred to below, on or before the Maturity Date specified in the
Restated Revolving Credit Agreement. Borrower further promises to pay interest
on the aggregate outstanding principal amount of the Revolving Loans at the
rates provided in the Restated Revolving Credit Agreement. All computations of
interest shall be in accordance with the provisions of the Restated Revolving
Credit Agreement.
If the Revolving Loans remain unpaid after maturity (whether
by acceleration or otherwise), Borrower shall pay interest on the aggregate
outstanding balance of the Revolving Loans at a per annum rate equal to two
percent (2%) greater than the interest rate otherwise in effect with respect
thereto.
Borrower shall make all payments hereunder in lawful money of
the United States of America and in immediately available funds to Bank's office
located at 192 Commercial Loan Center, 1980 Saturn Street, Monterey Park,
California 91754, attention: Department 77723 Supervisor, telefacsimile number:
213-724-6198.
Borrower hereby authorizes Bank to record in its books and
records or on the back of this Revolving Note the date, amount and interest rate
of each Revolving Loan (and, in the case of each Eurodollar Lending Rate
Borrowing, the Interest Period applicable thereto) and of each payment or
prepayment of principal made by Borrower, and agrees that all such notations
shall constitute prima facie evidence of the matters noted.
This Revolving Note is the Revolving Note referred to in that
certain Restated Revolving Credit Agreement dated as of July 10, 1996 by and
between Borrower and Bank (as at any time amended, supplemented, or otherwise
modified or restated, the "Agreement"), and is governed by the terms thereof.
Initially capitalized terms used herein which are not otherwise defined have the
meanings assigned to such terms in the Agreement.
[SIGNATURE BLOCK ON NEXT PAGE]
<PAGE>
This Revolving Note shall be governed by and construed in
accordance with the internal laws of the State of California without regard to
principles of conflicts of laws.
AMWEST INSURANCE GROUP, INC.
By:
Name:
Title:
<PAGE>
NOTICE OF BORROWING
(Revolving Loan)
To: UNION BANK OF CALIFORNIA, N.A.
Investment Banking Note Center #192
1980 Saturn Street
Monterey Park, California 91754
Attn:
Pursuant to that certain Restated Revolving Credit Agreement,
as of July 10, 1996 ( the "Agreement"), between Amwest Insurance Group, Inc., a
Delaware corporation ("Borrower"), on the one hand, and Union Bank of
California, N.A. on the other hand, this Notice of Borrowing represents
Borrower's request for a borrowing pursuant to Section 2.4 of the Agreement:
$__________ Reference Rate Borrowing; and
$__________ Eurodollar Rate Borrowing
with an interest Period of
months and expiring on , 19
Total: $__________
Borrower requests that the above extension of credit be made
available on , 19 .
The undersigned officer certifies that, as of the date of the
requested borrowing;
(i) the representations and warranties of Borrower contained
in the Agreement are true and correct in all material respects on and as of such
date, except to the extent such representations and warranties expressly relate
solely to an earlier date;
(ii) no Event of Default or Default has occurred and is
continuing under the Agreement or will result from the proposed borrowing;
(iii) Borrower has satisfied all conditions under the
Agreement to be performed or satisfied by it on or before such date.
Exhibit 2
<PAGE>
Each capitalized term contained in this Notice of Borrowing
and not separately defined herein shall have the meaning ascribed thereto in the
Agreement.
Dated: 19 .
AMWEST INSURANCE GROUP, INC.
a California corporation
By:
Title:
By:
Title:
Exhibit 2
<PAGE>
NOTICE OF CONVERSION/CONTINUATION
(Revolving Loan)
To: UNION BANK OF CALIFORNIA, N.A.
Investment Banking Note Center #192
1980 Saturn Street
Monterey Park, California 91754
Attn:
Pursuant to that certain Restated Revolving Credit Agreement,
dated as of July 10, 1996 (the "Agreement"), between Amwest Insurance Group,
Inc., a Delaware corporation ("Borrower"), on the one hand, and Union Bank of
California, N.A., on the other hand, this Notice of Conversion/Continuation
represents Borrower's request pursuant to Section 2.5 of the Agreement to:
(a) Convert $_________ in principal amount of
Reference Rate Borrowings on , 19 to a Eurodollar
Rate Borrowing with an Interest Period of [months]
and expiring on 19 ;
(b) Convert $ in principal amount Eurodollar
Rate Borrowings on , 19 , to a Reference
Rate Borrowing;
(c)Continue as Eurodollar Rate Borrowings
$_______________ in principal amount of presently
outstanding Eurodollar Rate Borrowings, commencing on
, 19 , with an Interest Period of [months]
and expiring on , 19 .
Exhibit 3
<PAGE>
Each capitalized term contained in this Request for
Conversion/Continuation and not separately defined herein shall have the meaning
ascribed thereto in the Agreement.
Dated: , 19--
AMWEST INSURANCE GROUP, INC.
a California corporation
By:
Title:
By:
Title:
EXHIBIT 3
<PAGE>
COMPLIANCE CERTIFICATE
To: Union Bank of California, N.A.
Reference is made to the Restated Revolving Credit Agreement dated as of
July 10, 1996, between AMWEST INSURANCE GROUP, INC., a Delaware corporation
("Borrower"), and UNION BANK OF CALIFORNIA, N.A. (the "Restated Revolving Credit
Agreement"). Terms defined in the Restated Revolving Credit Agreement and not
otherwise defined in this Compliance Certificate ("Certificate") shall have the
meanings defined for them in the Restated Revolving Credit Agreement. This
Certificate is delivered in accordance with Sections 5.2(c) and 5.2(f) of the
Restated Revolving Credit Agreement.
I. COMPLIANCE WITH FINANCIAL COVENANTS.
Through the fiscal quarter ending . Computations showing compliance
with Sections 5.9, 5.11, 5.12, 5.13, 5.14, 5.15, and 5.16 of the Loan Agreement
are as follows:
A. 5.9; Fixed-Charqe Coveraqe Ratio. The Fixed-Charge
Coverage Ratio, as computed in accordance with Section 5.9 of the Restated
Revolving Credit Agreement, is : 1.0.
COVENANT REQUIREMENT - Cannot be less than 1.1:1.0.
B. 5.11; Tanqible Net Worth. Tangible Net Worth as
computed in accordance with Section 1.1 and 5.11 of the
Restated Revolving Credit Agreement is .
COVENANT REQUIREMENT - Minimum Tangible Net Worth must be
greater than 90% of consolidated Tangible Net Worth at March
31, 1996, plus 50% of Borrower's net income. Minimum
Tangible Net Worth shall also be increased each fiscal year
by the dollar amount of any initial public offering of
securities.
C. 5.12; Net Profit. Net Profit as computed in accordance with
Section 1.1 and 5.12 of the Restated Revolving Credit Agreement is
.
EXHIBIT 4
<PAGE>
COVENANT REQUIREMENT - Must be > 0 on an annual basis.
D. 5.13; Policyholders' Surplus. Policyholders Surplus as computed
in accordance with Section 1.1 and 5.13 of the Restated Revolving Credit
Agreement is :
COVENANT REQUIREMENT - must be > 90% of Capital Surplus as of March 31,
1996.
E. 5.14; Operating Leverage Ratio. Operating Leverage Ratio as
computed in accordance with Sections 1.1 and 5.14 of the Restated Revolving
Credit Agreement is : 1.0.
COVENANT REQUIREMENT -Cannot exceed 3.0:1.0.
In the above computation, the Operating Leverage Ratio is computed as
follows:
Net Written Premiums (over the most recent four quarters) Capital
Surplus (as of the most recent quarterly ending date)
F. 5.15; A.M. Best Rating. A.M. Best Rating as discussed in
Section 5.15 of the Restated Revolving Credit Agreement is
COVENANT REQUIREMENT - Must maintain an A.M. Best rating of A- or
better.
G. 5.16; Investment Portfolio Quality. Investment Portfolio Quality
as discussed in Section 5.16 of the Restated Revolving Credit Agreement is
COVENANT REQUIREMENT - Must maintain an average fixed income portfolio
rating of A.
II.PERFORMANCE OF OBLIGATIONS.
A review of the activities of Borrower and its Subsidiaries during the
fiscal period covered by the attached financial statements has been made under
my supervision with a view to determining whether during such fiscal period
Borrower an dits Subsidiaries performed and observed all their respective
obligations under the Restated Resolving Credit Agreement. Except as described
in an attached document or in an earlier Certificate, Borrower and its
Subsidiaries performed and observed each covenant contained in the Restated
Revolving Credit Agreement applicable to it, and no Default or Event of Default
has occurred during such
EXHIBIT 4
<PAGE>
fiscal period which had not been previously waived by Bank nor is such a Default
or Event of Default continuing.
IN WITNESS WHEREOF, as a Senior Officer of Borrower, I
have signed this Certificate as of the day of
, 19--
BY:
Printed Name and Title
EXHIBIT 4
Excess of Loss
Bond Confirmation Slip
Terms' Effective: October 1, 1996
issued to
Amwest Surety Insurance Company
Woodland Hills, California
(hereinafter referred to collectively as the "Company")
by
Various Reinsurers
(hereinafter referred to as the "Reinsurer")
Reinsurance Confirmation Slip
Article I - Classes of Business Reinsured
By this Contract the Reinsurer agrees to reinsure the excess liability which may
accrue to the Company under Surety Bonds (hereinafter called "bonds") whether in
force or expired at the effective date hereof or issued by the Company on or
after that date (including bonds with premium anniversary dates on or after that
date), and classified by the Company as Contract Bonds, Subdivision Bonds or
Commercial Bonds subject to the terms, conditions and limitations hereinafter
set forth.
Article H - Term
A. This Contract shall become effective on October 1, 1995, with respect to
losses discovered by the Company on or after that date and shall remain in
force until December 31, 1997, both days inclusive.
B. Upon termination of this Contract, the following provisions shall apply:
1. The Reinsurer shall remain liable hereunder with respect to business in
force on the date of termination until:
a. As respects bonds written for an indefinite period and
containing a valid cancellation clause, the date of cancellation
or the date of the next premium anniversary, whichever first
occurs, after the date of termination of this Contract, but in
no event beyond 60 months following the date of termination of
this Contract;
b. As respects all other bonds, the date of expiration or final
settlement of the Company's liability, but in no event beyond 60
months following the date of termination of this Contract;
it being understood that any portion of the Reinsurer's share of
unearned premium in force 60 months following the date of termination
shall be promptly reallocated to the Company.
<PAGE>
2. Unless the Company elects to reassume the Reinsurer's portion of the
outstanding losses as of the date of termination of this Contract, and
so notifies the Reinsurer no later than 15 days after the date of
termination, the Reinsurer shall remain liable for its portion of the
Reinsurer's share of outstanding losses until final settlement or
commutation of all such losses.
D. Notwithstanding the provisions of paragraph C above, if the Company elects
to reassume the Reinsurer's portion of the unearned premium in force on the
effective date of termination of this Contract, and so notifies the
Reinsurer no later than 15 days after the date of termination, the
Reinsurer shall have no liability hereunder with respect to losses
discovered after the date of termination.
E. Notwithstanding paragraph A above, it is understood and agreed that should
at any time a subscribing reinsurer lose the whole or part of its paid up
capital, become insolvent, or be placed in conservation, rehabilitation or
liquidation, or be acquired or controlled by any other company or lose its
accreditation by the U.S. Treasury Department, become a non-admitted
reinsurer in the State of California or be downgraded by A.M. Best Company
to "B+" or less, the Company shall have the right to terminate this
Contract by giving such subscribing reinsurer 15 days prior notice by
certified mail.
Article III - Territory
The liability of the Reinsurer shall be limited to losses discovered under bonds
issued to principals domiciled within the territorial limits of the United
States of America, its territories or possessions, Puerto Rico, the District of
Columbia and Canada, inclusive of principals domiciled in the United States of
America which are performing obligations in Mexico; but this limitation shall
not apply to losses if the Company's bonds provide coverage outside the
aforesaid territorial limits.
Article IV - Exclusions
A. This Contract does not apply to and specifically excludes the following:
1. Business accepted by the Company as reinsurance from other insurance
companies or associations, except business originally written or
reunderwritten by the Company.
2. Any loss or liability accruing to the Company directly or indirectly)
from any business written by or through any pool or association, not
including pools or associations under which membership by the Company
is required under statutes or regulations or voluntary membership in
pools and associations that are approved by Kemper Reinsurance Company,
acting for and on behalf of the Reinsurer.
3. Co-surety bonds not controlled in their entirety by the Company (except
as provided for under Article VII).
4. Reclamation bonds negotiated prior to or during the mining phase of a
parcel of property, except commercial bonds when part of an account.
5. Workers' Compensation self-insurance bonds or any other self-insurance
bonds, except commercial bonds when part of an account.
<PAGE>
6. Asbestos Abatement/Removal contracting, except incidental exposures
(i.e., the lesser of 25% of the total! job contract or $500,000 for
that portion of the total job contract).
7. Completion bonds.
8. Hazardous Waste Closure bonds and Post Closure bonds, except commercial
bonds when part of an account.
9. Fidelity and Commercial Crime bonds.
10. Lease bonds, except commercial bonds when part of an account.
11. Financial Guarantee, Credit Insurance or any miscellaneous bond(s)
classified as SAA #580, #581 and #597.
12. ERISA bonds.
13. Mortgage Impairment, Deficiency or Guarantee bonds.
14. Rate Guarantee bonds.
15. Money Market Guarantee or Guarantee of Installment Paper bonds.
16. Bank Depository bonds.
17. Note Guarantee bonds or bonds guaranteeing letters of credit.
18. Casualty insurance or any third party tort liability.
19. All Contract bonds issued by the Company with estimated completion
terms greater than three years in length (not including the time
involved in start-up delays), other than service business contracts.
20. Bonds to principals in claim for amounts greater than $500,000 except
commercial bonds when part of an account and pre-approved by Kemper
Reinsurance Company.
B. However, any reinsurance that is specially accepted from the Company by
Kemper Reinsurance Company and Scor Reinsurance Company, acting for and on
behalf of the Reinsurer, shall be covered under this Contract and subject
to the terms hereof, except to the extent such terms are modified by the
special acceptance.
<PAGE>
Article V - Retention and Limit
A. The Company shall retain and be liable for the first $2,000,000 of ultimate
net loss (whether involving any one or any combination of the classes of
business covered hereunder) as respects losses discovered during the
contract year under all bonds issued to any one principal. The Reinsurer
shall then be liable for the amount by which such ultimate net loss exceeds
the Company's retention, but the liability of the Reinsurer shall not
exceed $4,000,000 of ultimate net loss as respects losses discovered during
the contract year under all bonds issued to any one principal, nor shall it
exceed $8,000,000 in the aggregate as respects losses discovered during the
contract year.
B. "Ultimate net loss" as used herein is defined as the sum or sums (including
extra contractual obligations, interest on judgments, litigation expenses
and all other loss adjustment expenses, except office expenses and
salaries of the Company's regular employees) paid or payable by the Company
in settlement of claims and in satisfaction of judgments rendered on
account of such claims, after deduction of all salvage, all recoveries and
all claims on inuring insurance or reinsurance, whether collectible or not
Ultimate net loss shall also be reduced by collateral (as perfected)
associated with bonds subject to this Contract (or a pro rata portion
thereof, where the collateral is also associated with bonds not subject
hereto). As respects co-surety bonds controlled by the Company, only losses
attributable to the Company's participation on such bonds shall be
considered ultimate net loss hereunder. Nothing herein shall be construed
to mean that losses under this Contract are not recoverable until the
Company's ultimate net loss has been ascertained.
It is understood that the Company is not responsible for the reduction in
value or collapse of collateral due to unforeseen events after the original
collateral assessment has been made. Moreover, the value of collateral
shall be subsequently re-evaluated by the Company in the event adjustments
are being made to the collective performance or completion penalty amounts
issued to one principal.
C. "Extra contractual obligations" as used herein shall be defined as 80.0% of
those liabilities not covered under any other provision of this Contract an
which arise from the handling of any claim on business covered hereunder,
such liabilities arising because of, but not limited to, the following:
failure by the Company to settle within the bond limit, or by reason of
alleged or actual negligence, fraud or bad faith in rejecting an offer of
settlement or in the preparation of the defense or in the trial of any
action against its insured or reinsured or in the preparation or
prosecution of any appeal consequent upon such action or unintentional
violation of any Unfair Claim or Trade Practice Act or any similar act or
any related law or statute. This Coverage shall not apply
where the loss has been incurred due to the fraud of a member of the Board
of Directors or a corporate officer of the Company acting individually or
collectively or in collusion with any individual or corporation or any
other organization or party involved in the presentation, defense or
settlement of any claim covered hereunder. Recoveries from any form of
insurance or reinsurance which protects the Company against extra
contractual obligations claims shall inure to the benefit of this Contract.
If any provision set forth in this paragraph is held to be invalid under
the law of any state, that provision shall be deemed to comply with the
minimum requirements of such law, giving due consideration to the original
intentions of the parties. But this shall not affect the validity or
enforceability of the original provisions in any other jurisdiction.
D. "Contract year" as used in this Contract shall mean the period from October
1, 1996 to December 31, 1997, both days inclusive. In the event this
Contract is terminated on a "runoff" basis, the contract year shall be from
the beginning of the contract year through the end of the runoff period.
E. A loss shall be deemed "discovered" on the date when the Company has
incurred an ultimate net loss of $500,000 or more (net of surplus or quota
share reinsurance) for any one principal through the establishment of
reserves, payments, assumption or guarantee of liabilities to prevent a
default, or any combination thereof. The date on which an extra contractual
obligation is discovered by the Company shall be deemed, in all
circumstances, to be the date the original loss is discovered. The
discovery date shall determine the contract year to which such loss is
assigned, and shall not be subject to change regardless of fluctuation in
the amount of the incurred loss.
<PAGE>
F. The Company may maintain in force pro rata reinsurance, recoveries under
which shall inure to the benefit of this Contract.
G. The term "principal" as used herein shall mean one or more principals under
the same management and control, or one or more principals for which bonds
were executed in reliance upon the indemnity of the same person, fu-m or
corporation, or in reliance upon the indemnity of a related group of
persons, firm or corporations. However, when the Company receives bonding
opportunities from separate principals that operate under individual
financial statements but may have corporate affiliations and are engaged in
different types of contracting projects, the Company may be able to
classify each principal as a separate entity, when approved by Kemper
Reinsurance Company.
Article VI - Reinstatement
A. In the event all or any portion of the reinsurance provided under this
Contract is exhausted by loss, the amount so exhausted shall be reinstated
immediately from the time the loss is discovered by the Company.
B. Notwithstanding paragraph A above the liability of the Reinsurer for
reinsurance coverage provided shall not exceed either of the following:
1. $4,000,000 as respects loss or losses discovered under any one
principal; nor
2. $8,000,000 in all during the contract year.
Article VII - Co-Surety Bonds
It is agreed that with respect to co-surety bonds, the Company's cession to the
Reinsurer shall be the same percentage of the applicable reinsurance limit that
the amount of the bond controlled by the Company bears to the full amount of the
bond.
Article VIII - Losses
A. Whenever a loss discovered by the Company exceeds the Company's retention
hereunder and/or appears likely (in the Company's opinion) to result in a
claim hereunder, the Company shall notify the Reinsurer, and the Reinsurer
shall have the right to participate in the adjustment of such loss at its
own expense.
B. All loss settlements made by the Company, provided they are within the
terms of this Contract, shall be unconditionally binding upon the
Reinsurer. Except as provided in paragraph C below, the Reinsurer agrees to
pay all amounts for which it may be liable immediately upon receipt of
reasonable evidence of the amount paid (or scheduled to be paid) by the
Company.
C. Within 45 days after the end of each calendar quarter, the Company shall
provide the Reinsurer a loss bordereau which lists all losses by principal
for losses exceeding $500,000 in the aggregate that were reported to the
Company from the inception of this Contract through the calendar quarter
under consideration and will contain the following information, listed by
principal:
<PAGE>
1. Name of principal;
2. Bond number;
3. Date of loss;
4. Amount of loss;
5. Obligee;
6. Status update on each loss;
7. Whether any salvage, subrogation or collateral proceedings are in
progress.
Article IX - Salvage and Subrogation
The Reinsurer shall be credited with salvage and subrogation (i.e.,
reimbursement obtained or recovery made by the Company, less the actual cost,
excluding salaries of officials and employees of the Company and sums paid to
attorneys as retainer, of obtaining such reimbursement or making such recovery)
on account of claims and settlements involving reinsurance hereunder. Salvage
thereon shall always be used to reimburse the excess carriers in the reverse
order of their priority according to their participation before being used in
any way to reimburse the Company for its primary loss. The Company hereby agrees
to enforce its rights to salvage or subrogation relating to any loss, a part of
which loss was sustained by the Reinsurer, and to prosecute all claims arising
out of such rights.
Article X - Premium
1. As premium for the reinsurance provided during the contract year, the
Company shall pay the Reinsurer the greater of $1,200,000 or 1.90% of
the Company's earned premium for the contract year. In the event this
contract is terminated on a run off basis, the Company shall pay the
Reinsurer 1.90% of the Company's earned premium during the run off
period.
2. The Company shall pay the Reinsurer a deposit premium of $1,500,000 in
five equal installments of $300,000 payable at October 1, 1996, January
1, April 1, July 1 and October 1, 1997.
3. Within 60 days after the end of the contract year, the Company shall
provide a report to the Reinsurer setting forth the premium due
hereunder for the contract year, computed in accordance with paragraph
1 above, and any additional premium due the Reinsurer or return premium
due the Company shall be remitted promptly.
4. "Earned premium" as used herein shall mean unearned premiums at the
beginning of the contract year, plus written premiums during the
contract year, less unearned premiums at the end of the contract year.
Article XI - Commutation
Not later than 15 days after the close of any one contract year, the Company at
its sole option may require commutation of all claims deemed discovered for said
contract year which have not been finally settled and are likely to result in a
claim under this Contract. The Company shall determine the commuted value of the
Reinsurer's share of outstanding loss and loss adjustment expense as of the date
of any such commutation, based on the known losses as of that date, and payment
thereof by the Reinsurer of its proportion of such amount or amounts shall
constitute a complete and final release of any further liability hereunder on
the part of the Reinsurer as respects all outstanding loss and loss adjustment
expense, whether known or unknown. The Reinsurer shall forego the fight to any
unearned premium and outstanding loss reserves as of the effective date of
commutation.
<PAGE>
Article XII - Offset (BRMA 36C)
The Company and the Reinsurer shall have the right to offset any balance or
amounts due from one party to the other under the terms of this Contract. The
party asserting the fight of offset may exercise such fight any time whether the
balances due are on account of premiums or losses or otherwise.
Article XIII - Access to Records (BRMA 1D)
The Reinsurer or its designated representatives shall have the access at any
reasonable time to all records of the Company which pertain in any way to this
reinsurance.
Article XIV - Liability of the Reinsurer
A. The liability of the Reinsurer shall follow that of the Company in every
case, and be subject in all respects to all the general and special
stipulations, clauses, waivers and modifications of the Company's bonds,
and any endorsements thereon. However, in no event shall this be construed
in any way to provide coverage outside the terms and conditions set forth
in this Contract.
B. Nothing herein shall in any manner create any obligations or establish any
fights against the Reinsurer in favor of any third party or any persons not
parties to this Contract.
Article XV - Net Retained Lines (BRMA 32B)
A. This Contract applies only to that portion of any bond which the Company
retains net for its own account, and in calculating the amount of any loss
hereunder and also in computing the amount or amounts in excess of which
this Contract attaches, only loss or losses in respect of that portion of
any bond which the Company retains net for its own account shall be
included.
B. The amount of the Reinsurer's liability hereunder in respect of any loss or
losses shall not be increased by reason of the inability of the Company to
collect from any other reinsurer(s), whether specific or general, any
amounts which may have become due from such reinsurer(s), whether such
inability arises from the insolvency of such other reinsurer(s) or
otherwise.
Article XVI - Errors and Omissions (BRMA 14F)
Inadvertent delays, errors or omissions made in connection with this Contract or
any transaction hereunder shall not relieve either party from any liability
which would have attached had such delay, error or omission not occurred,
provided always that such error or omission is rectified as soon as possible
after discovery.
<PAGE>
Article XVII - Currency (BRMA 12A)
A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they
shall be construed to mean United States Dollars and all transactions under
this Contract shall be in United States Dollars.
B. Amounts paid or received by the Company in any other currency shall be
converted to United States Dollars at the rate of exchange at the date such
transaction is entered on the records of the Company.
Article XVIII - Taxes (BRMA 50C)
In consideration of the terms under which this Contract is issued, the Company
will not claim a deduction in respect of the premium hereon when making tax
returns, other than income or profits tax returns, to any state or territory of
the United States of America, the District of Columbia or Canada.
Article XIX - Federal Excise Tax (BRMA 17A)
(Applicable to those reinsurers, excepting Underwriters at Lloyd's London and
other reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow for the purpose of paying the Federal
Excise Tax the applicable percentage of the premium payable hereon as
imposed under Section 4371 of the Internal Revenue Code to the extent such
premium is subject to the Federal Excise Tax.
B. In the event of any return premium becoming dale hereunder the Reinsurer
will deduct the applicable percentage from the return premium payable
hereon and the Company or its agent should take steps to recover the tax
from the United States Government.
Article XX - Unauthorized Reinsurers
A. If the Reinsurer is unauthorized in any state of the United States of
America or the District of Columbia, the Reinsurer agrees to fund its share
of the Company's ceded United States unearned premium and outstanding loss
and loss adjustment expense reserves (including incurred but not reported
loss reserves, hereinafter referred to as "IBNR") by:
1. Clean, irrevocable and unconditional letters of credit issued and
confirmed, if confirmation is required by the insurance regulatory
authorities involved, by a bank or banks meeting the NAIC Securities
Valuation Office credit standards for issuers of letters of credit and
acceptable to said insurance regulatory authorities; and/or
2. Escrow accounts for the benefit of the Company; and/or
3. Cash advances;
if, without such funding, a penalty would accrue to the Company on any
financial statement it is required to file with the insurance regulatory
authorities involved. The Reinsurer, at its sole option, may fund in other
than cash if its method and form of funding are acceptable to the insurance
regulatory authorities involved.
<PAGE>
B. If the Reinsurer is unauthorized in any province or jurisdiction of Canada,
the Reinsurer agrees to fund 115% of its share of the Company's ceded
Canadian unearned premium and outstanding loss and loss adjustment expense
reserves (excluding IBNR) by:
1. A clean, irrevocable and unconditional letter of credit issued and
confirmed, if confirmation is required by the insurance regulatory
authorities involved, by a Canadian bank or banks meeting the NAIC
Securities Valuation Office credit standards for issuers of letters of
credit and acceptable to said insurance regulatory authorities, for no
more than 15/115ths of the total funding required; and/or
2. Cash advances for the remaining balance of the funding required;
if, without such funding, a penalty would accrue to the Company on any
financial statement it is required to file with the insurance regulatory
authorities involved.
C. With regard to funding in whole or in part by letters of credit, it is
agreed that each letter of credit will be in a form acceptable to insurance
regulatory authorities involved, will be issued for a term of at least one
year and will include an "evergreen clause," which automatically extends
the term for at least one additional year at each expiration date unless
written notice of non-renewal is given to the Company not less than 30 days
prior to said expiration date. The Company and the Reinsurer further agree,
notwithstanding anything to the contrary in this Contract, that said
letters of credit may be drawn upon by the Company or its successors in
interest at any time, without diminution because of the insolvency of the
Company or the Reinsurer, but only for one or more of the following
purposes:
1. To reimburse itself for the Reinsurer's share of unearned premiums
returned to insureds on account of bond cancellations, unless paid in
cash by the Reinsurer;
2. To reimburse itself for the Reinsurer's share of losses and/or loss
adjustment expenses paid under the terms of bonds reinsured hereunder,
unless paid in cash by the Reinsurer;
3. To reimburse itself for the Reinsurer's share of any other amounts
claimed to be due hereunder, unless paid in cash by the Reinsurer;
4. To fund a cash account in an amount equal to the Reinsurer's share of
any ceded unearned premium and/or outstanding loss and loss adjustment
expense reserves (including IBNR) funded by means of a letter of credit
which is under non-renewal notice, if said letter of credit has not
been renewed or replaced by the Reinsurer 10 days prior to its
expiration date;
5. To refund to the Reinsurer any sum in excess of the actual amount
required to fund the Reinsurer's share of the Company's ceded unearned
premium and/or outstanding loss and loss adjustment expense reserves
(including IBNR), if so requested by the Reinsurer.
In the event the amount drawn by the Company on any letter of credit is in
excess of the actual amount required for C(1), C(2) or C(4), or in the case
of C(3), the actual amount determined to be due, the Company shall promptly
return to the Reinsurer the excess amount so drawn.
D. For purposes of determining the amount to be funded under this Article,
IBNR shall be calculated on a per principal basis, and shall not exceed
10.0% of total known subject losses discovered per principal in excess of
the Company's retention hereunder (outstanding loss and loss adjustment
expense reserves only), subject to a maximum of $450,000 per principal.
<PAGE>
Article XXI - Insolvency
A. In the event of the insolvency of one or both of the reinsured companies,
this reinsurance shall be payable directly to the company or to its
liquidator, receiver, conservator or statutory successor immediately upon
demand, with reasonable provision for verification, on the basis of the
liability of the company without diminution because of the insolvency of
the company or because the liquidator, receiver, conservator or statutory
successor of the company has failed to pay all or a portion of any claim.
It is agreed, however, that the liquidator, receiver, conservator or
statutory successor of the company shall give written notice to the
Reinsurer of the pendency of a claim against the company indicating the
bond reinsured which claim would involve a possible liability on the part
of the Reinsurer within a reasonable time after such claim is filed in the
conservation or liquidation proceeding or in the receivership, and that
during the pendency of such claim, the Reinsurer may investigate such claim
and interpose, at its own expense, in the proceeding where such claim is to
be adjudicated, any defense or defenses that it may deem available to the
company or its liquidator, receiver, conservator or statutory successor.
The expense thus incurred by the Reinsurer shall be chargeable, subject to
the approval of the Court, against the company as part of the expense of
conservation or liquidation to the extent of a pro rata share of the
benefit which may accrue to the Company solely as a result of the defense
undertaken by the Reinsurer.
B. Where two or more reinsurers are involved in the same claim and a majority
in interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of this Contract as though such
expense had been incurred by the company.
C. It is further understood and agreed that, in the event of the insolvency of
one or both of the reinsured companies, the reinsurance under this Contract
shall be payable directly by the Reinsurer to the company or to its
liquidator, receiver, conservator or statutory successor, except as
provided by Section 4118(a) of the New York Insurance Law or except:
1. Where this Contract specifically provides another payee of such
reinsurance in the event of the insolvency of the company; or
2. Where the Reinsurer with the consent of the direct insured or insureds
has assumed such bond obligations of the company as direct obligations
of the Reinsurer to the payees under such bonds and in substitution for
the obligations of the company to such payees. Prior to implementation
of a novation mentioned in this subparagraph, the certificate of
assumption on New York risks shall be approved by the Superintendent of
the State of New York.
Article XXII - Arbitration (BRMA 6J)
A. As a condition precedent to any right of action hereunder, in the event of
any dispute or difference of opinion hereafter arising with respect to this
Contract, it is hereby mutually agreed that such dispute or difference of
opinion shall be submitted to arbitration. One Arbiter shall be chosen by
the Company, the other by the Reinsurer, and an Umpire shall be chosen by
the two Arbiters before they enter upon arbitration, all of whom shall be
active or retired disinterested executive officers of insurance or
reinsurance companies. In the event that either party should fail to choose
an Arbiter within thirty (30) days following a written request by the other
party to do so, the requesting party may choose two Arbiters who shall in
turn choose an Umpire before entering upon arbitration. If the two Arbiters
fail to agree upon the selection of an Umpire within thirty (30) days
following their appointment, each Arbiter shall nominate three candidates
within ten (10) days thereafter, two of whom the other
shall decline, and the decision shall be made by drawing lots.
<PAGE>
B. Each party shall present its case to the Arbiters within thirty (30) days
following the date of appointment of the Umpire. The Arbiters shall
consider this Contract as an honorable engagement rather than merely as a
legal obligation and they are relieved of all judicial formalities and may
abstain from following the strict rules of law. The decision of the
Arbiters shall be final and binding on both parties; but failing to agree,
they shall call in the Umpire and the decision of the majority shall be
final and binding upon both parties. Judgment upon the final decision of
the Arbiters may be entered in any court of competent jurisdiction.
C. If more than one reinsurer is involved in the same dispute, all such
reinsurers shall constitute and act as one party for purposes of this
Article and communications shall be made by the Company to each of the
reinsurers constituting one party, provided, however, that nothing herein
shall impair the rights of such reinsurers to assert several, rather than
joint, defenses or claims, nor be construed as changing the liability of
the reinsurers participating under the terms of this Contract from several
to joint.
D. Each party shall bear the expense of its own Arbiter, and shall jointly and
equally bear with the other the expense of the Umpire and of the
arbitration. In the event that the two Arbiters are chosen by one party, as
above provided, the expense of the Arbiters, the Umpire and the arbitration
shall be equally divided between the two parties.
E. Any arbitration proceedings shall take place in Woodland Hills, California,
but notwithstanding the location of the arbitration, all proceedings
pursuant hereto shall be governed by the law of the State of California.
Article XXIII - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not
domiciled in the United States of America, and/or is not authorized in any
State, Territory or District of the United States where authorization is
required by insurance regulatory authorities)
A. It is agreed that in the event the Reinsurer fails to pay any amount
claimed to be due hereunder, the Reinsurer, at the request of the Company,
will submit to the jurisdiction of any court of competent jurisdiction
within the United States. Nothing in this Article constitutes or should be
understood to constitute a waiver of the Reinsurer's rights to commence an
action in any court of competent jurisdiction in the United States, to
remove an action to a United States District Court, or to seek a transfer
of a case to another court as permitted by the laws of the United States or
of any state in the United States.
B. Further, pursuant to any statute of any state, territory or district of the
United States which makes provision therefor, the Reinsurer hereby
designates the party named in its Interests and Liabilities Agreement, or
if no party is named therein, the Superintendent, Commissioner or Director
of Insurance or other officer specified for that purpose in the statute, or
his successor or successors in office, as its true and lawful attorney upon
whom may be served any lawful process in any action, suit or proceeding
instituted by or on behalf of the Company or any beneficiary hereunder
arising out of this Contract.
Article XXIV - Assignment
The Company may not assign the Contract, or its rights under this Contract,
except with the express written agreement of the Reinsurer.
<PAGE>
Article XXV - Agency Agreement
A. Amwest Surety Insurance Company shall be deemed the agent of Far West
Insurance Company for purposes of sending or receiving notices required by
the terms and conditions of this Contract, and for purposes of remitting or
receiving any monies due any party.
B. Notwithstanding the provisions of paragraph A above, each party to this
Contract agrees to honor the terms set forth herein as if this Contract
were a separate agreement between the Reinsurer and each individually named
reinsured company. Balances payable or recoverable by any subscribing
reinsurer or each individual named reinsured company shall not serve to
offset any balances payable or recoverable to or from any other named
reinsured company.
C. Reports and remittances made to the Reinsurer in accordance with the
provisions of this Contract are to be in sufficient detail to identify both
the Reinsurer's loss obligations due each reinsured company and each
reinsured company's premium remittance under the report.
Article XXVI - Intermediary (BRMA 23A)
E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this
Contract for all business hereunder. All communications (including but not
limited to notices, statements, premium, return premium, commissions, taxes,
losses, loss adjustment expense, salvages and loss settlements) relating thereto
shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co.,
Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431.
Payments by the Company to the Intermediary shall be deemed to constitute
payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall
be deemed to constitute payment to the Company only to the extent that such
payments are actually received by the Company.
Aggregate Excess of Loss
Reinsurance Placement Slip
Effective: January 1, 1997
issued to
Amwest Surety Insurance Company
and
Far West Insurance Company
both of Woodland Hills, California
(hereinafter referred to collectively as the "Company")
by
Underwriters Reinsurance Company (Barbados) Inc.
Barbados, West Indies
Article I - Business Reinsured
By this Contract the Reinsurer agrees to reinsure and/or indemnify the Company
for the net excess liability which may accrue to the Company during the term of
this contract under its bonds, policies, contracts and binders of insurance or
reinsurance (hereinafter called "bonds") whether in force or expired on the
effective date hereof, issued or renewed on or after that date (including bonds
with premium anniversary dates on or after that date), for all surety business
written by the Company (direct and assumed), subject to the terms, conditions
and limitations hereinafter set forth.
Article II -Term
The term of this Contract shall be January 1, 1997 through December 31, 1997,
both days inclusive, with respect to losses occurring during said period.
Article III- Territory (BRMA 51A)
The territorial limits of this Contract shall be identical with those of the
Company's bonds.
Article IV - Retention and Limit
A. No claim shall be made under this Contract unless and until the Company shall
have first incurred an amount of ultimate net loss on business covered during
the contract term in excess of the greater of $19,000,000 or 25.86% of its net
earned premium for contract term. The Reinsurer shall then be liable for the
greater of $5,000,000 or 7.0% of net earned premium for the term of this
agreement in excess of Company's ultimate net loss in excess of its retention
for the term of this agreement.
B. As respects contract surety business subject hereunder, the maximum bond
limit (except statutory) any one bond shall be deemed not to exceed $2,000,000,
with limits written in excess of this amount deemed reinsured elsewhere.
C. The Company shall have the option to purchase additional reinsurance limit
equal to the greater of $5,000,000 or 7.0% of net earned premium. This option
expires on December 31, 1997 and can only be exercised if the ultimate net loss
ceded under this contract is less than $2,500,000.
Article V - Definitions
A. "Net excess liability" as used herein shall mean those amounts payable by
the Company as defined in the ultimate net loss definition set forth in
paragraph B below.
B. "Ultimate net loss" as used herein is defined as the sum or sums (including
loss in excess of bond limits, extra contractual obligations, prejudgment
interest if included as part of an award or judgment and any loss adjustment
expense, as herein after defined) paid or payable by the Company in settlement
of claims and in satisfaction of judgments rendered on account of such claims,
after deduction of all salvage, all recoveries and all claims on inuring
insurance or reinsurance, whether collectible or not. Nothing herein shall be
construed to mean that losses under this Contract are not recoverable until the
Company's ultimate net loss has been ascertained.
C. "Loss in excess of bond limits" and "extra contractual obligations" as
used herein shall mean:
1. "Loss in excess of bond limits" shall mean 90% of any amount paid or
payable by the Company under a bond ceded to this Contract in excess of its bon
limits, but otherwise within the terms of its bond, as a result of an action
against it by its insured or its insured's assignee to recover damages the
insured is legally obligated to pay to a third party claimant because of the
Company's alleged or actual negligence or bad faith in rejecting a settlement
within bond limits, or in discharging its duty to defend or prepare the defense
in the trial of an action against its insured, or in discharging its duty to
prepare or prosecute an appeal consequent upon such an action.
2. "Extra contractual obligations" shall mean 90% of any punitive,
exemplary, compensatory or consequential damages, other than loss in excess of
bond limits, paid or payable by the Company under a bond ceded to this Contract
as a result of an action against it by its insured, its insured's assignee or a
third party claimant, which action alleges negligence or bad faith on the part
of the Company in handling a claim under a bond subject to this Contract.
Any loss in excess of bond limits or extra contractual obligation shall be
deemed to have occurred on the same date as the loss covered or alleged to be
covered under the bond.
Notwithstanding anything stated herein, this Contract shall not apply to
any loss incurred by the Company as a result of any fraudulent and/or criminal
act by any officer or director of the Company acting individually or
collectively or in collusion with an individual or corporation or any other
organization or party involved in the presentation, defense or settlement of any
claim covered hereunder
D. "Loss adjustment expense" as used herein shall mean expenses allocable to
the investigation, defense and/or settlement of specific claims, including
1) prejudgment interest, unless included as part of the award or judgment;
2) post-judgment interest; and 3) legal expenses and costs incurred in
connection with coverage questions and legal actions connected thereto; but not
including office expenses or salaries of the Company's regular employees, except
that allocated outside costs of the Company shall be included.
With respect to legal expenses and costs incurred in direct connection
with declaratory judgment actions brought to resolve bond language coverage
disputes between the Company and its insured, such expenses shall, for purposes
of this Contract, not exceed an amount equal to the applicable limit of the bond
or bonds involved unless agreed to by the Reinsurer.
E. "Net earned premium" as used herein is defined as gross earned premium of the
Company for the classes of business reinsured hereunder, less the earned portion
of premiums ceded by the Company for reinsurance which inures to the benefit of
this Contract or increases the Company's available capacity.
Article VI - Other Reinsurance
A. Notwithstanding the provisions of paragraph B of Article IV, the Company is
permitted, but not required, to purchase other facultative and/or other treaty
reinsurance on business subject to this Contract. Premiums ceded by the Company
for reinsurance which inures to the benefit of this Contract or increases the
Company' s available capacity shall be deducted in determining subject premium
hereunder as provided in Article IX.
B. It is agreed by the Company that inuring reinsurance agreements in force
at the inception of this Contract shall remain in force during the term of
this Contract, or so deemed.
Article VII - Loss Notices and Settlements
A. Whenever losses sustained by the Company appear likely to result in a
claim hereunder, the Company shall notify the Reinsurer, and the Reinsurer shall
have the right to participate in the adjustment of such losses at its own
expense.
B. All loss settlements made by the Company, provided they are within the terms
of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees
to pay all amounts for which it may be liable upon receipt of reasonable
evidence of the amount paid (or scheduled to be paid) by the Company.
Article VIII - Salvage and Subrogation
The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or
recovery made by the Company, less the actual cost, excluding salaries of
officials and employees of the Company and sums paid to attorneys as retainer,
of obtaining such reimbursement or making such recovery) on account of claims
and settlements involving reinsurance hereunder. Salvage thereon shall always be
used to reimburse the excess carriers in the reverse order of their priority
according to their participation before being used in any way to reimburse the
Company for its primary loss. The Company hereby agrees to enforce its rights to
salvage or subrogation relating to any loss, a part of which loss was sustained
by the Reinsurer, and to prosecute all claims arising out of such rights.
Article IX - Reinsurance Premium
A. As premium for the reinsurance provided hereunder, the Company shall pay
the Reinsurer 2.0% of its net earned premium.
B. The Company shall pay the Reinsurer an annual minimum and deposit premium
of $1,500,000, payable in equal semi-annual installments of $750,000 at January
1 and July 1, 1997.
C. Within 60 days after the end of each accident year, the Company shall provide
a report to the Reinsurer setting forth the premium due hereunder, computed in
accordance with paragraph A, and any additional premium due the Reinsurer or
return premium due the Company shall be remitted promptly.
D. As respects the reinsurance limit available under paragraph C of Article IV,
the premium payable shall be adjusted at a rate of 1.33% of net earned premium
subject to a minimum and deposit premium of $1,000,000 payable at January 1,
1998.
Article X - Late Payments
A. It is understood and agreed that the provisions of this Article shall not
be implemented unless specifically invoked, in writing, by one of the parties
to this Contract.
B. In the event any premium, loss or other payment due either party is not
received by the intermediary named in Article XXV (hereinafter referred to as
the "Intermediary") by the payment due date, the party to whom payment is due
may, by notifying the Intermediary in writing, require the debtor party to pay,
and the debtor party agrees to pay, an interest penalty on the amount past due
calculated for each such payment on the last business day of each month as
follows:
1. The number of full days which have expired since the due date or the
last monthly calculation, whichever the lesser; times
2. 1/365th of the six month (or nearest thereto) U.S. Treasury Bill rate,
as quoted in the Wall Street Journal on the first business day of the month for
which the calculation is being made; times
3. The amount past due, including accrued interest.
It is agreed that interest shall accumulate until payment of the original
amount due plus interest penalties have been received by the Intermediary.
C. The establishment of the due date shall, for purposes of this Article, be
determined as follows:
1. As respects the payment of routine deposits and premiums due the
Reinsurer, the due date shall be as provided for in the applicable section of
this Contract. In the event a due date is not specifically stated for a given
payment, it shall be deemed due 45 days after the date of transmittal by the
Intermediary of the initial billing for each such payment.
2. Any claim or loss payment due the Company hereunder shall be deemed due
five business days following receipt by the applicable Subscribing Reinsurer of
written notification that payment has been received from Subscribing Reinsurers
constituting at least 662/3% of the interests and liabilities of all Subscribing
Reinsurers participating under the applicable layer of this Contract, who are
active as of the due date; it being understood that said date shall not be later
than 75 days from the date of transmittal by the Intermediary of the initial
billing for each such payment.
3. As respects any payment, adjustment or return due either party not
otherwise provided for in subparagraphs 1 and 2 of paragraph C above, the due
date shall be deemed as five business days following receipt of written
notification that the provisions of this Article have been invoked.
For purposes of interest calculations only, amounts due hereunder shall be
deemed paid upon receipt by the Intermediary.
D. Nothing herein shall be construed as limiting or prohibiting 1) a Subscribing
Reinsurer from contesting the validity of any claim, or from participating in
the defense or control of any claim or suit; or 2) either party from contesting
the validity of any payment, or from initiating any arbitration or other
proceeding in accordance with the provisions of this Contract. If the debtor
party prevails in an arbitration or other proceeding, then any interest
penalties due hereunder on the amount in dispute shall be null and void. If the
debtor party loses in such proceeding, then the interest penalty on the amount
determined to be due hereunder shall be calculated in accordance with the
provisions set forth above unless otherwise determined by such proceedings. If a
debtor party advances payment of any amount it is contesting, and proves to be
correct in its contestation, either in whole or in part, the other party shall
reimburse the debtor party for any such excess payment made plus interest on the
excess amount calculated in accordance with this Article.
E. As provided under Article VIII, it is understood and agreed that the Company
shall furnish the Reinsurer with usual and customary claim information and
nothing herein shall be construed as limiting or prohibiting a Subscribing
Reinsurer from requesting additional information that it may deem necessary.
F. As respects subparagraph 2 of paragraph C above, a Subscribing Reinsurer
shall be deemed not to be active when it 1) ceases assuming new or renewal
reinsurance business through the Intermediary; 2) is declared insolvent, or put
in liquidation, conservatorship or rehabilitation by a competent regulator
authority or court; 3) is declared insolvent, or is the subject of an
administrative order or enters provisional liquidation and/or liquidation; or 4)
has a reduction in its statutory surplus or shareholders' funds of 50% or more
from its statutory surplus or shareholders' funds as of the effective date of
this Contract.
G. Interest penalties arising out of the application of this Article that are
$100 or less from any party shall be waived unless there is a pattern of late
payments consisting of three or more items over the course of any 12-month
period.
Article XI - Reports and Remittances
Within 60 days after the end of each calendar quarter following the end of the
contract term, the Company shall report to the Reinsurer its aggregate ultimate
net loss paid for the contract term as of the end of the quarter. If the
aggregate ultimate net loss paid exceeds an amount equal to the Company's
retention hereunder for the contract term based on an estimate of the Company's
net earned premium for the contract term, the Reinsurer shall pay its portion of
such estimated excess (net of any prior payments for the contract term).
However, any such payment by the Reinsurer shall be provisional, subject to
adjustment when the Company's actual ultimate net loss and net earned premium
for the contract term have been determined.
Article XII - Commutation
The Company may commute this Contract with agreement by the Reinsurer.
Article XIII - Offset (BRMA 36C)
The Company and the Reinsurer shall have the right to offset any balance or
amounts due from one party to the other under the terms of this Contract. The
party asserting the right of offset may exercise such right any time whether the
balances due are on account of premiums or losses or otherwise.
Article XIV - Access to Records (BRMA 1D)
The Reinsurer or its designated representatives shall have access at any
reasonable time to all records of the Company which pertain in any way to this
reinsurance.
Article XV - Net Retained Lines (BRMA 32B)
A. This Contract applies only to that portion of any bond which the Company
retains net for its own account, and in calculating the amount of any loss
hereunder and also in computing the amount or amounts in excess of which this
Contract attaches, only loss or losses in respect of that portion of any bond
which the Company retains net for its own account shall be included.
B. The amount of the Reinsurer's liability hereunder in respect of any loss or
losses shall not be increased by reason of the inability of the Company to
collect from any other reinsurer(s), whether specific or general, any amounts
which may have become due from such reinsurer(s), whether such inability arises
from the insolvency of such other reinsurer(s) or otherwise.
Article XVI - Errors and Omissions (BRMA 14F)
Inadvertent delays, errors or omissions made in connection with this Contract or
any transaction hereunder shall not relieve either party from any liability
which would have attached had such delay, error or omission not occurred,
provided always that such error or omission is rectified as soon as possible
after discovery.
Article XVII - Currency (BRMA 12A)
A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they
shall be construed to mean United States Dollars and all transactions under
this Contract shall be in United States Dollars.
B. Amounts paid or received by the Company in any other currency shall be
converted to United States Dollars at the rate of exchange at the date such
transaction is entered into the books of the Company.
Article XVIII - Taxes (BRMA 50C)
In consideration of the terms under which this Contract is issued, the Company
will not claim a deduction in respect of the premium hereon when making tax
returns, other than income or profits tax returns, to any state or territory of
the United States of America, the District of Columbia or Canada.
Article XIX - Insolvency
A. In the event of the insolvency of one or more of the reinsured companies,
this reinsurance shall be payable directly to the company or to its liquidator,
receiver, conservator or statutory successor immediately upon demand, with
reasonable provision for verification, on the basis of the liability of the
company without diminution because of the insolvency of the company or because
the liquidator, receiver, conservator or statutory successor of the company has
failed to pay all or a portion of any claim. It is agreed, however, that the
liquidator, receiver, conservator or statutory successor of the company shall
give written notice to the Reinsurer of the pendency of a claim against the
company indicating the bond or bond reinsured which claim would involve a
possible liability on the part of the Reinsurer within a reasonable time after
such claim is filed in the conservation or liquidation proceeding or in the
receivership, and that during the pendency of such claim, the Reinsurer may
investigate such claim and interpose, at its own expense, in the proceeding
where such claim is to be adjudicated, any defense or defenses that it may deem
available to the company or its liquidator, receiver, conservator or statutory
successor. The expense thus incurred by the Reinsurer shall be chargeable,
subject to the approval of the Court, against the company as part of the expense
of conservation or liquidation to the extent of a pro rata share of the benefit
which may accrue to the company solely as a result of the defense undertaken by
the Reinsurer.
B. Where two or more reinsurers are involved in the same claim and a majority in
interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of this Contract as though such expense
had been incurred by the company.
C. It is further understood and agreed that, in the event of the insolvency
of one or more of the reinsured companies, the reinsurance under this Contract
shall be payable directly by the
Reinsurer to the company or to its liquidator, receiver or statutory
successor, except as provided by Section 4118(a) of the New York Insurance Law
or except (1) where this Contract specifically provides another payee of such
reinsurance in the event of the insolvency of the company or (2) where the
Reinsurer with the consent of the direct insured or insureds has assumed such
bond obligations of the company as direct obligations of the Reinsurer to the
payees under such policies and in substitution for the obligations of the
company to such payees.
Article XX - Arbitration
A. As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Contract,
including the formation or validity thereof, shall be submitted for decision to
a panel of three arbitrators. Notice requesting arbitration will be in writing
and sent certified or registered mail, return receipt requested.
B. One arbitrator shall be chosen by each party and the two arbitrators shall,
before instituting the hearing, choose an impartial third arbitrator who shall
preside at the hearing. If either party fails to appoint its arbitrator within
thirty (30) days after being requested to do so by the other party, the latter,
after ten (10) days notice by certified or registered mail of its intention to
do so, may appoint the second arbitrator.
C. If the two arbitrators are unable to agree upon the third arbitrator within
thirty (30) days of their appointment, the two arbitrators will jointly petition
the American Arbitration Association to appoint the third arbitrator from the
AAA's Panel of Reinsurance Arbitrators.
D. All arbitrators shall be disinterested active or former executive officers of
insurance or reinsurance companies, underwriters at Lloyd's of London,
reinsurance intermediaries and attorneys actively or formerly engaged in
practicing law in the areas of insurance or reinsurance.
E. Within thirty (30) days after notice of appointment of all arbitrators, the
panel shall meet and determine timely periods for briefs, discovery
procedures and schedules for heatings.
F. The panel shall be relieved of all judicial formality and shall not be bound
by the strict rules of procedure and evidence. The arbitration shall take place
in Woodland Hills, California or, if unanimously agreed by the panel, any other
mutually acceptable location.
G. If more than one reinsurer is involved in the same dispute, all such
reinsurers shall constitute and act as one party for purposes of this article.
However, nothing shall impair the rights of such reinsurers to assert several
rather than joint defenses or claims, nor shall this provision be construed as
changing the liability of the reinsurers under the terms of this Contract from
several to joint.
H. The panel shall make its decision considering custom and practice as promptly
as possible following the termination of hearings. The decision of any two
arbitrators, when rendered in writing shall be final and binding, and judgment
upon the award may be entered in any court having jurisdiction. The panel is
empowered to grant such interim relief as it may deem appropriate.
I. Each party shall bear the expense of its own arbitrator and shall jointly and
equally with the other party bear the cost of the third arbitrator. The
remaining costs of the arbitration shall be allocated by the panel. The panel
may, at its discretion, award such further costs and expenses as it considers
appropriate, including but not limited to attorney's fees and interest to the
extent permitted by law. Insofar as the arbitration panel chooses to look to
substantive law, it shall consider the law of the State of California.
Article XXI - Service of Suit (BRMA 49C)
(Applicable if the Reinsurer is not domiciled in the United States of America,
and/or is not authorized in any State, Territory or District of the United
States where authorization is required by insurance regulatory authorities)
A. It is agreed that in the event the Reinsurer fails to pay any amount claimed
to be due hereunder, the Reinsurer, at the request of the Company, will submit
to the jurisdiction of a court of competent jurisdiction within the United
States. Nothing in this Article constitutes or should be understood to
constitute a waiver of the Reinsurer's rights to commence an action in any court
of competent jurisdiction in the United States, to remove an action to a United
States District Court, or to seek a transfer of a case to another court as
permitted by the laws of the United States or of any state in the United States.
B. Further, pursuant to any statute of any state, territory or district of the
United States which makes provision therefor, the Reinsurer hereby designates
the party named in its Interests and Liabilities Agreement, or if no party is
named therein, the Superintendent, Commissioner or Director of Insurance or
other off~cer specified for that purpose in the statute, or his successor or
successors in office, as its true and lawful attorney upon whom may be served
any lawful process in any action, suit or proceeding instituted by or on behalf
of the Company or any beneficiary hereunder arising out of this Contract.
Article XXII - Agency Agreement
Amwest Surety Insurance Company shall be deemed the agent of the other reinsured
company for purposes of sending or receiving notices required by the terms and
conditions of this Contract, and for purposes of remitting or receiving any
monies due any party.
Article XXIH - Intermediary (BRMA 23A)
E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this
Contract for all business hereunder. All communications (including but not
limited to notices, statements, premium, return premium, commissions,
taxes, losses, loss adjustment expense, salvages and loss settlements) relating
thereto shall be transmitted to the Company or the Reinsurer through E. W.
Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis,
Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to
constitute payment to the Reinsurer. Payments by the Reinsurer to the
Intermediary shall be deemed to constitute payment to the Company
only to the extent that such payments are actually received by the Company.
SEPARATION AGREEMENT
AND GENERAL AND SPECIAL RELEASE OF CLAIMS
This Separation Agreement and General and Special Release of Claims
(the "Agreement") is made and entered into as of December 31, 1996 by and
between Arthur F. Melton ("Melton") on the one hand and Amwest Insurance Group,
Inc., a Delaware corporation ("Amwest"), Amwest Surety Insurance Company, a
California corporation ("Amwest Surety"), and Far West Insurance Company, a
California Corporation ("Far West") (together with their affiliates sometimes
collectively referred to as the "Companies"), on the other hand.
WHEREAS, Melton has been for several years prior to the
execution of this Agreement, an executive employee, officer and director of
Amwest and of Amwest's subsidiaries, Amwest Surety and Far West; and
WHEREAS, Melton desires to resign from all of his present
officer and employee positions with Amwest, Amwest Surety, Far West and any of
their respective affiliates; and
WHEREAS, Melton and Amwest, Amwest Surety, and Far West are
desirous of entering into this Agreement to resolve amicably all matters between
them on the terms set forth herein.
NOW, THEREFORE, in consideration of the premises and mutual
covenants set forth herein, the parties hereto agree as follows:
1. Resignation as Officer & Employee - Melton hereby
voluntarily resigns, effective November 22, 1996, as an officer and
employee of Amwest, Amwest Surety, Far West and any and all of their
respective affiliates. The Companies accept Melton's resignations.
Melton understands that his resignations are final and irrevocable and
that the Companies are relying on his resignations in business and
employment planning. However, Melton is not resigning as a director
or as a member of the Board of Directors (or any committee thereof) of
Amwest, Amwest Surety, Far West or any of their respective affiliates.
Melton agrees to execute appropriate letters of resignation
simultaneously with the execution of this Agreement.
2. Severance Payments - For so long as Melton is in full
compliance with the terms of this Agreement, Amwest Surety shall pay to
Melton as severance pay an amount equal to an aggregate gross amount of $
200,567, less payroll taxes, payable every two weeks at the same time as
salary is paid to Amwest Surety executives, in twenty-six equal
installments each in the gross amount of
$7,714.12, less payroll taxes, commencing December 10, 1996. Except as
specifically set forth in this Agreement, Melton acknowledges and agrees
that there are no other monies or benefits, including without limitation,
vacation pay, sick pay or bonus, payable now or in the future from Amwest,
Amwest Surety, Far West or any of their affiliates.
3. Stock Options - It is acknowledged and agreed that Melton
currently holds options to purchase 55,900 shares of Amwest's Common Stock
(the "Stock Options"), 30,700 of which are currently vested, and 25,200 of
which are unvested, at various exercise prices ranging from $8.375 to
$14.25 per share. The Stock Options were granted pursuant to stock option
agreements dated December 3, 1990, March 17, 1992, May 20, 1993, March 22,
1994, April 4, 1995, April 4, 1995 and April 10, 1996 (collectively the
"option Agreements").
The parties intend that, notwithstanding any provisions to
the contrary contained in the Option Agreements or elsewhere, none of the
Stock Options shall expire, terminate or accelerate by virtue of Melton's
resignations contemplated in Paragraph 1 above. Consequently, it is hereby
agreed that each of the Option Agreements is hereby amended and modified to
provide language to the following effect: "If Optionee both: (a) ceases to
be employed by the Company or its parent or any subsidiary, and (b) ceases
to be a member of the Board of Directors of the Company or its parent or
any subsidiary other than as a result of Optionee's retirement or death,
then this Option, subject to earlier termination pursuant to other relevant
provisions of this Option Agreement, shall expire three months after the
later to occur of (a) and (b) above, and during such period after Optionee
ceases to be an employee and a member of the Board of Directors of the
Company (or its parent or any subsidiary), this Option shall be exercisable
only as to those shares, if any, with respect to which the Optionee could
have exercised the Option as of the date of cessation of employment or
cessation of service as a member of the Board of Directors of the Company,
whichever is later."
4. Insurance - Amwest Surety agrees to ask its carriers to
consent to continuance of coverage under its group health, life and
disability insurance plans, as they presently exist and as they may from
time to time be amended with respect to executive employees, for Melton and
his presently-designated dependents at the same levels as existed at time
of termination through November 30, 1997. If such consent is given Amwest
Surety will pay the cost of such coverage. Provided, however, Amwest Surety
shall be under no obligation to change its group insurance carrier(s),
or to self-insure, or, except as provided in the 2nd-to-last sentence
of this Paragraph 4, otherwise to provide or pay for medical, dental, life
and/or disability coverage or expenses if such carriers refuse to consent.
Provided further, should Melton become eligible for medical, dental, life,
and/or disability insurance paid for in whole or in part by another
employer, Melton shall immediately notify Amwest Surety, and Amwest
Surety will then be entitled to discontinue Melton's (and any
dependents') coverage under the particular plan in question. At that
time, or in the event Amwest Surety's insurance carrier(s) refuse to
consent to cover Melton under Amwest Surety's group health, disability
and/or life insurance plans, Amwest Surety will pay to Melton in one lump
sum, an amount equal to the premiums then paid for such medical, dental,
life and/or disability insurance coverage, multiplied by the number of
months then remaining during which installment payments are to be made
under this Agreement. Nothing herein shall in any way affect Melton's
entitlements to continuation coverage under and in accordance with COBRA.
5. Accrued But Untaken Sick and Vacation Pay; Other Employee
Payments - Melton acknowledges that Amwest Surety owes Melton the gross amount
of $37,064.25, less payroll taxes, in full payment of any and all accrued but
untaken sick and vacation pay owed by the Companies to Melton.
6. Termination Of Senior Executive Severance Agreement;
Indemnity Agreement - The parties agree that effective immediately, any Senior
Executive Severance Agreement by and between Amwest and Melton is hereby
terminated and shall be of no further force or effect. It is hereby agreed that
all Indemnity Agreements by and between Amwest and Melton shall remain in full
force and effect.
7. Covenant Not to Compete - Melton agrees with Amwest
Surety that during the period of time payments are made to Melton as specified
in Paragraph 2 herein, he will not, in the counties of California,
or elsewhere in the United States where Amwest, Amwest Surety, Far West, or
any of their respective affiliates currently conduct their businesses,
directly or indirectly own an interest in, operate, join, control or
participate in, or be connected as an officer, employee, director, agent,
independent contractor, partner, shareholder, consultant or principal of any
corporation, partnership, agency, proprietorship, firm, association,
person or other entity which sells, markets, underwrites or issues surety,
fidelity or bail bonds; provided, however, that Melton shall not be prohibited
hereunder from being employed by a business entity whose revenues
derived from surety insurance premiums were at least $10,000, but were
less than 10% of such entity's total revenues for its last fiscal year. Melton
agrees that nothing contained in this Paragraph 7 reduces or in any way
diminishes his fiduciary or other duties or responsibilities owed to Amwest,
Amwest Surety or Far West as a member of the boards of directors of such
corporations.
8. Remedies For Breach of Agreement - In the event Melton
breaches or in any way violates any provision of this Agreement, including
specifically the Covenant Not to Compete set forth in Paragraph 7 above, in
addition to all the remedies available to Amwest Surety at law and in equity,
Amwest Surety shall be entitled immediately: a) to cease making any further
payments set forth in Paragraph 2 above, b) to provide Melton with notice that
he will forfeit any unvested Stock Options to which he would otherwise have been
entitled under Paragraph 3 herein, and c) to terminate any and all coverage
under the plans set forth in Paragraph 4 above, except for COBRA continuation
coverage. In addition, Amwest Surety and Melton recognize and acknowledge that
any breach of the Covenant Not to Compete by Melton can not reasonably or
adequately compensate Amwest Surety in damages, and that Amwest Surety shall be
entitled to injunctive relief, which may include, but not be limited to,
restraining Melton from rendering any service that would breach the Covenant Not
to Compete set forth in Paragraph 7, the arbitration agreement contained in
paragraph 10 notwithstanding. No remedy conferred on Amwest Surety by any of the
specific provisions in this Agreement, including this Paragraph 8, is intended
to be exclusive of any other remedy, and each and every remedy shall be
cumulative, and shall be in addition to every other remedy given hereunder or
hereafter existing at law or in equity, or by statute or otherwise. The election
of any one or more remedies by Amwest Surety shall not constitute a waiver of
its right to pursue other available remedies. Amwest Surety agrees to provide to
Melton notice of breaches of this Agreement by Melton (including reasonable
specifics which form the basis for such breach) 15 days before it shall exercise
any of the remedies set forth herein. If Melton, in the opinion of Amwest
Surety, does not fully and completely cure all breaches specified in the notice
within 15 days after his receipt of such notice, Amwest Surety shall be entitled
to exercise any or all of its rights set forth in this paragraph in addition to
every other right or remedy existing at law or in equity, by statute or
otherwise.
9. Releases
A. General and Special Releases By Melton.
-As a material provision of this Agreement, Melton (for himself, his
agents, heirs, successors, assigns, executors and/or administrators) does
hereby and forever release and discharge Amwest, Amwest Surety and Far West
and each of their past and present parent, subsidiary and affiliated
corporations, divisions or other entities, if any, as well as the successors,
shareholders, officers, directors, heirs, predecessors, assigns, agents,
employees, attorneys and representatives of each of them, past or present, from
any and all causes of action, actions, judgments, liens, debts, contracts,
indebtedness, damages, losses, claims, liabilities, rights, interests and
demands of whatsoever kind or character, known or unknown, suspected to exist or
not suspected to exist, anticipated or not anticipated, whether or not
heretofore brought before any state or federal court or before any state or
federal agency or other governmental entity, which Melton has or may have
against any released person or entity, by reason of any and all acts, omissions,
events or facts occurring or existing prior to the date hereof, including,
without limitation, all claims attributable to the employment of Melton, all
claims attributable to the termination of that employment, and all claims
arising under any federal, state or other governmental statute, regulation or
ordinance or common law, such as, for example and without limitation, Title VII
of the Civil Rights Act of 1964 which prohibits discrimination on the basis of
sex, race, color, national origin and religion, the civil Rights Act of 1866,
the Americans With Disabilities Act, the Age Discrimination in Employment Act
which prohibits discrimination on the basis of age over 40, the California Fair
Employment and Housing Act which prohibits discrimination on the basis of race,
religious creed, color, national origin, ancestry, physical disability, mental
disability, medical condition, marital status, age over 40, and sex, the
California Labor Code, wrongful termination claims and claims for breach of
implied or express contract, excepting only those obligations expressly recited
to be performed hereunder.
B. General and Special Releases By Amwest, Amwest Surety and
Far West. - As a material provision of this Agreement, Amwest, Amwest Surety and
Far West do hereby and forever release and discharge Melton from any and all
causes of action, actions, judgments, liens, debts, contracts, indebtedness,
damages, losses, claims, liabilities, rights, interests and demands of
whatsoever kind or character, known or unknown, suspected to exist or not
suspected to exist, anticipated or not anticipated, whether or not heretofore
brought before any state or federal court or before any state or federal agency
or other governmental entity, which the Companies may have against any released
person or entity, by reason of any and all acts, omissions, events or facts
occurring or existing prior to the date hereof, including, without limitation,
all claims attributable to the employment of Melton, all claims attributable to
the termination of that employment, and all claims arising under any federal,
state or other governmental statute, regulation or ordinance or common law, such
as, for example and without limitation, Title VII of
the civil Rights Act of 1964 which prohibits discrimination on the basis of sex,
race, color, national origin and religion, the civil Rights Act of 1866, the
Americans With Disabilities Act, the Age Discrimination in Employment Act which
prohibits discrimination on the basis of age over 40, the California Fair
Employment and Housing Act which prohibits discrimination on the basis of race,
religious creed, color, national origin, ancestry, physical disability, mental
disability, medical condition, marital status, age over 40, and sex, the
California Labor Code, wrongful termination claims and claims for breach of
implied or express contract, excepting only those obligations expressly recited
to be performed hereunder.
C. Excepted Claims. - Notwithstanding the provisions of
Paragraph 9B, nothing contained herein or in any other provision of this
Agreement shall release, acquit or discharge Melton from any claim: (a) arising
out of or relating to Melton gaining in fact any personal profit or advantage
from or at the expense of Amwest, Amwest Surety or Far West or any of their
affiliates to which Melton is not or was not legally entitled, (b) relating to
an accounting of profits made from the purchase or sale by Melton of securities
of Amwest in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or similar provisions of any state law, or (c) based upon or arising
out of Melton's knowingly fraudulent, deliberately dishonest or willful
misconduct.
D. Waiver Of Unknown Claims. It is further understood
and agreed that all rights of the parties hereto under Section 1542 of
the Civil Code of California and any similar law of any state or
territory of the United States are hereby expressly waived. This section reads
as follows:
1542. Extent of General Release by Creditor Against Unknown
Claims. A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the
time of executing the release, which if known by him must have
materially affected his settlement with the debtor.
Melton and the Companies hereby declare and represent that no
promise, inducement, or agreement not set forth in this Agreement has been made
to any of them, and that this Agreement contains the entire agreement between
the parties hereto.
10. Arbitration - As a material part of this Agreement,
Melton and the Companies expressly agree that any and all disputes,controversies
or claims arising out of or concerning this Agreement,any alleged breach of this
Agreement, or the matters resolved and settled by this Agreement, including but
not limited to disputes, controversies or claims arising out of Melton's
employment by the Companies or its termination, or this Agreement, whether
arising under theories of liability or damages based on contract, tort or
statute, shall be determined exclusively by final and binding arbitration before
a single arbitrator in accordance with the Employment Dispute Resolution Rules
of the American Arbitration Association, unless other rules are provided in this
Paragraph, and that judgment upon the award rendered by the arbitrator may be
rendered in any court of competent jurisdiction. Claims subject to exclusive
final and binding arbitration under this Agreement include, without limitation,
claims that otherwise could be tried in court to the court or to a jury in the
absence of this Agreement. Such claims include, without limitation, claims for
breach of contract, breach of the implied covenant of good faith and fair
dealing, breach of oral or written promise, wrongful termination, constructive
discharge, infliction of emotional distress, defamation, interference with
contract relations or prospective economic advantage, negligence,
misrepresentation, retaliation, or employment discrimination, and including
without limitation any claim for punitive damages or allegedly lost compensation
or recovery for personal injury on any theory of pleading or proof, claims for
attorneys' fees, or alleged violations of the California Labor Code (including
Section 970), the California Constitution, the California Fair Employment and
Housing Act prohibiting discrimination based on sex, race, religious creed,
color, national origin, ancestry, physical disability, mental disability,
medical condition, marital status, or age over 40, Title VII of the 1964 civil
Rights Act prohibiting discrimination based on race, color, religion, sex or
national origin, and the Americans with Disabilities Act prohibiting
discrimination based on disability, and the Age Discrimination in Employment Act
prohibiting discrimination based on age over 40, as these statutes have been
from time to time amended. MELTON AND THE COMPANIES EXPRESSLY GIVE UP AND WAIVE
ALL RIGHTS TO A JURY TRIAL IN COURT ON ANY SUCH STATUTORY OR OTHER CLAIMS. Any
arbitration shall be held in Los Angeles, California. The Arbitrator will make
his/her award in writing and shall accompany it with an opinion discussing the
evidence and setting forth the reasons for the award. The Companies and Employee
shall equally share the fees and costs of the Arbitrator.
11. Entire Agreement - This Agreement constitutes a single
integrated contract expressing the entire agreement of the parties with respect
to the subject matter hereof and supersedes all prior and contemporaneous oral
and written agreements and discussions with respect to the subject matter
hereof. There are no other agreements, written or oral,
express or implied, between the parties hereto, concerning the subject matter
hereof, except as set forth herein. This Agreement may be amended or modified
only by an agreement in writing.
12. Governing Law; Notices; Separability -
(a) The formation, construction, and performance
of this Agreement shall be construed in accordance with the laws of
California and the promises contained in Paragraph 7 shall be construed as
a separate covenant in each of the separate cities and counties of the United
States in which Amwest, Amwest Surety, or Far West and their respective
affiliates are presently engaged in business.
(b) Any notice required or permitted under this
Agreement shall be given in writing to
Amwest, Amwest Surety, and Far West either by personal service or by registered
or certified mail, postage prepaid, addressed to Amwest, in care of its
President, at its then principal place of business. Any such notice to Melton
shall be given in a like manner and, if mailed, shall be addressed to Melton at
320 Junipero Plaza, Santa Barbara, CA. 93105. For the purpose of determining
compliance with any time limit in this Agreement, a notice shall be deemed to
have been duly given (i) on the date of service, if served personally on the
party to whom notice is to be given, or (ii) on the third business day after
mailing, if mailed to the party to whom the notice is to be given in the manner
provided in this subsection.
(c) In the event that any provision of this
Agreement is determined to be invalid,
prohibited or unenforceable for any reason, this Agreement shall be construed as
if such invalid, prohibited or unenforceable provision had been more narrowly
drawn so as not to be invalid, prohibited or unenforceable. If, notwithstanding
the foregoing, any provision of this Agreement would be held to be invalid,
prohibited or unenforceable, such provision shall be ineffective to the extent
of such invalidity, prohibition or unenforceability, without invalidating the
remaining provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction. If any provision is
held invalid or unenforceable with respect to particular circumstances, it shall
nevertheless remain in full force and effect in all other circumstances.
13. Nonassignability; Death or Disability of Melton - This
Agreement may not be assigned by Melton. If Melton should become disabled or die
while any amounts are still payable to him hereunder, all such amounts shall be
paid in accordance with the terms of this Agreement to Melton in the event of
his disability or to Melton's executor, administrator, conservator or estate in
the event of his death.
14. Further Assurances; Melton Activities - The parties agree
they will sign any and all documents, certificates, and all other instruments
necessary to carry out the purposes and intent of this Agreement. In addition,
Melton agrees that from and after November 22, 1996, he shall not, in any
manner, represent or act for, or on behalf of, Amwest, Amwest Surety and Far
West, their affiliates, or any of them, except as Amwest's Chairman of the Board
of Directors or President shall direct in writing.
15. Confidential Information and Trade Secrets -Melton hereby
reaffirms his continuing obligation to safeguard the confidentiality of trade
secrets and confidential information known to him through his employment with
Amwest, Amwest Surety and Far West, their affiliates, or any of them, affirms
that nothing in this Agreement abridges such obligations, and agrees to consult
at once with the President of Amwest regarding any questions he may have
regarding the meaning or application of such obligations in a specific
circumstance. Melton acknowledges that he is in possession of material
information not generally available to the public regarding Amwest, Amwest
Surety and Far West and their affiliates. Melton acknowledges that he is aware
of the provisions of the securities laws prohibiting the disclosure of such
material inside information to third parties, including but not limited to
securities analysts, and agrees that he shall not make any such disclosures
without the prior written consent of Amwest's President. Furthermore, Melton
agrees from the date this Agreement is executed through December 31, 1998 he
will not communicate in a derogatory manner with any person (except his
counsel), including without limitation, any stock analyst or stockholder or
employee of Amwest, Amwest Surety or Far West, or any of them, regarding Amwest,
Amwest Surety or Far West or their affiliates, without the prior consent of the
President of Amwest; provided, however, Melton shall be permitted, without the
prior consent of the President of Amwest, to discuss with potential employers
the responsibilities Melton had while employed by Amwest, Amwest Surety and Far
West.
16. Business Reputation of Amwest, Amwest Surety and Far West
- - Melton agrees that the business reputation of Amwest, Amwest Surety and Far
West, their affiliates and each of them is of critical importance to such
companies. Melton agrees that he shall not, for the term of this Agreement
(during which time Melton acknowledges and agrees that he owes Amwest, Amwest
Surety and Far West a duty of loyalty), make or disclose to any person any
statement, in written or oral form, if it could be reasonably expected that the
business reputation(s) of Amwest, Amwest Surety, Far West, and/or their
affiliates and/or any of their respective employees, or any of them, could be
injured or damaged in any fashion whatsoever as a result of such statement.
17. Waiting Period and Right Of Revocation - MELTON
ACKNOWLEDGES THAT HE IS AWARE THAT AND IS HEREBY ADVISED THAT HE HAS THE RIGHT
TO CONSIDER THIS AGREEMENT FOR TWENTY-ONE DAYS BEFORE SIGNING IT AND THAT IF HE
SIGNS IT PRIOR TO THE EXPIRATION OF TWENTY-ONE DAYS, MELTON IS WAIVING THIS
RIGHT FREELY AND VOLUNTARILY.
MELTON ALSO ACKNOWLEDGES THAT HE IS AWARE OF AND IS HEREBY
ADVISED OF HIS RIGHT TO REVOKE THIS AGREEMENT FOR A PERIOD OF SEVEN DAYS
FOLLOWING THE SIGNING OF THIS AGREEMENT AND THAT 'IT SHALL NOT BECOME EFFECTIVE
OR ENFORCEABLE UNTIL THE REVOCATION PERIOD HAS EXPIRED. TO REVOKE THIS
AGREEMENT, MELTON MUST NOTIFY AMWEST SURETY WITHIN SEVEN DAYS OF SIGNING IT.
18. Attorney Advice - MELTON ACKNOWLEDGES THAT HE IS AWARE OF
HIS RIGHT TO CONSULT AN ATTORNEY, THAT HE HAS BEEN ADVISED TO CONSULT WITH AN
ATTORNEY, AND THAT HE HAS HAD THE OPPORTUNITY TO CONSULT WITH AN ATTORNEY, IF
DESIRED, PRIOR TO SIGNING THIS AGREEMENT.
19. Understanding Of Agreement - Melton states that he
has carefully read this Agreement, that he has had sufficient time and
opportunity to consider its terms and get legal advice, that he understands
its final and bindingffect, that the only promises made to him to sign this
Agreement are those stated above and that Melton is signing this Agreement
voluntarily.
AMWEST INSURANCE GROUP, INC.
Dated: December , 1996 By:
---------------------
John E. Savage
President
AMWEST SURETY INSURANCE COMPANY
Dated: December , 1996 By:
---------------------
John E. Savage
President
FAR WEST INSURANCE COMPANY
Dated: December , 1996 By:
---------------------
John E. Savage
President
Dated: December , 1996 By:
--------------------
Arthur F. Melton
